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Title:
Regulation of financial services interest rates

Reference ID:
12G0

Department Responsible:
Department for Business, Enterprise and Regulatory Reform

Problem Description:
If I borrow 1000 at 10% APR I expect the loan to be paid off after 12 months if I have paid 1100 and made the payments on time. However, I won't have paid off the loan at all if it is a credit card or similar account where multiple rates of interest are charged on the total amount borrowed and the banks insist that I can only pay off the lowest interest rates first. Thus my loan of 1000 might take much more than 12 months to pay off if there is a crippling rate of interest elsewhere on the card which is limiting my ability to make repayments. This practice of forcing customers to pay off the lowest rate of interest first is fundamentally unfair as it requires the entire balance to be cleared in order for the quoted lowest APR rate to be actualised.

Proposed solution:
Either prohibit multiple interest rates on the same account, or allow customers to choose which interest rate they are wanting to clear when a balance is credited or simply make the default regulation that in the consumers interests, the highest rate must be the balance which is cleared first.

Banks will hate this change, however the financially oppressed and worse off in society will love it, as it will help them to manage their debts better. Currently this abusive practice benefits the banks and hits those in society who can least afford to repay their debts the hardest.

Cost or time incurred:
Personally I've never been in this situation, but it must be affecting hundreds of thousands of people and companies daily. With a credit crunch on, this is not what these people need.

The golden rule when getting out of debt is to pay off the highest interest rate loans first, I cannot understand how it can possibly be in the interests of the poorest in society for banks to make this extremely difficult by following the above practice.

Department:
Department for Business, Enterprise and Regulatory Reform

Category(s):
Economics and finance

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