The government’s sums don’t add up when it comes to how much borrowers will be charged if they pay off their loans early under new Consumer Credit Act guidelines, says Target Group.
The financial software provider is calling on lenders to lobby the Office of Fair Trading to change its stance on early repayment charges.
The CCA will replace the Rule of 78 when it comes into force in April. Under the Rule of 78, consumers were hit with excessive interest payments when settling loans early.
The new rules will only allow lenders to charge a maximum of two months’ interest, or one month for one-year loans.
They also allow 58 days’ interest to be charged as penalties.
But Graham Llewellyn-Berry, consultant at Target Group, says the new rules are unnecessarily complex and mathematically inconsistent.
He says: “Fixed rate loans make up about 90% of the sector but there is also a sizeable second charge market with loan packagers offering varying rates.
“The OFT states in its guidelines that ERCs should use loan rates but they may change considerably during the life of the loans.”
He also believes the way in which settlements are calculated is flawed.
He says: “The guidelines call for present values to be calculated using days where necessary, preferably weeks if the number of days is divisible by seven.
“To account for leap years, 365.25 days should be used, but in practice it’s 52 weeks so no provisions for leap years have been made.”
But Kam Sanghani, managing director of Label Loans, says the CCA can be interpreted in different ways.
He says: “The difficulty is that Target will have various lenders that it deals with and it will have to find a solution that satisfies them.
“The rules are open to interpretation. Those involved have to bear in mind the key principles of fairness to customers and consistency in applying the rules.”