Not so hi-finance

From Sohan Jheeta

I recently bought a hi-fi. To my surprise the proprietor offered me an interest-free loan voluntarily. I informed him that I would rather pay cash and that he ought to let me have some discount since I would not be using the credit facility. He refused. Anyway, after weighing up the pros and cons, I was tempted to purchase the hi-fi on hire purchase. This got me thinking – loans are easily available, but why? In addition, the offered loan was of the unsecured type as well as being interest-free, but only if the loan were fully paid off in the first 12 months. If some proportion of the loan remains unpaid, the whole of the credit is charged retrospectively at a whopping 29.9% APR.

I wonder how many people fall short of paying the loan in full by the end of the 12-month period. The majority of the people I suspect, because otherwise lenders would not be falling over backwards in making this money so easily available.

Whether anyone can afford the loan initially or not is irrelevant because . I couldn&#39t understand at first as to why, but eventually I managed to get my head around it. The reason lenders are hell-bent on &#39pushing&#39 the money is simple – the lender expects one to default on the payments, so they can take one to court.

This is because once in court the lender can have an earnings attachment made for an amount which the client can afford comfortably, and usually this is a minimal amount so that interest accrues for longer.

The upshot of this transaction is that the old agreement comes to an end and, as a result, a new agreement is forged. The new agreement generally attracts a new, (higher) rate of interest. So is it any wonder that lenders are falling over backwards to lend money to unsuspecting members of the public?

Sohan Jheeta

Personal Investment Planning Services

Leeds