Saturday May 9, 2009

Untangling HP interest rates and such

A QUESTION OF BUSINESS
By P. GUNASEGARAM

Banking products are never easy to understand but clearly stating their effective interest rates will go a long way to helping customers make their choice.

IT is unfortunate, for the customer that is, that old, archaic banking practices such as hire purchase continue to be foisted on them.

They are a problem because hire purchase companies, most of whom are now banks, still quote a flat rate.

That means the rate is quoted on a principal that does not decline with payment. While on paper the rate looks low, the effective interest rate is actually high, sometimes as much as two times depending on the tenure of the facility.

Thus, many unsophisticated consumers are seduced into buying all manner of consumer goods from cars downwards because they think they are paying low interest rates when effective interest rates are much higher.

For illustration, a flat rate of 10% with tenure of five years works out to an effective over 17%, quite a difference! Yes, the Hire Purchase Act comes under the purview of the Ministry of Domestic Trade and Consumer Affairs but that does not mean that banks and financial institutions cannot state the effective interest rate too in addition to the flat interest rate.

If financial institutions don’t want to state the effective interest rate, they may be misleading millions of misinformed customers into believing they are paying lower interest rates than they actually are.

Perhaps Bank Negara can require financial institutions to state the effective interest rates for these loans at least for the institutions that come under its purview.

Hire purchase apart, there are myriad interest rates and offers which make it very difficult for bank customers to determine which are the best for their purposes and which eventually give them the best deals.

Breaking up various charges such as late penalty charges for credit cards as well as additional charges for overseas purchases for instance into effective interest rates can greatly assist customers to determine the full cost of using these services and make their decisions accordingly.

With the increased sophistication of banking services and all manner of charges which can affect the effective interest rate that customers pay, it becomes imperative that services, especially to the retail sector, be clearly explained so that the consumer knows what he is getting himself into.

One of the key factors that many retail customers have to worry about these days is whether they would be better off refinancing their housing loans where tenures are typically very long and even a minute change in interest rates can affect considerably the total amount paid.

While most housing loans are variable and pegged to the base lending rate of the respective banks, many customers are simply not aware that refinancing their housing loans at current much more attractive rates can save them tens of thousands of ringgit over the tenure of their loans, even after paying the requisite penalties.

While there are moving costs, sometimes the mere threat of refinancing by the customer often nudges the current loan provider to give interest rates at lower than agreed levels. For that the customer needs information.

There is a wealth of such information available at a website (http://www.bankinginfo.com.my) maintained by Bank Negara using data provided from the Association of Banks in Malaysia.

That is a pretty good starting point for those who want to start by comparing rates and others services.

Bank Negara and the Association of Banks are to be heartily applauded for the information provided. It not only includes such data but also information on banking, budgeting, personal finance and financial and budget calculators.

Ultimately customers too have a responsibility to educate themselves about financial matters, which are getting increasingly complex. They ignore financial knowledge and analysis at their own peril.

Managing editor P. Gunasegaram asks you to check out “bankinginfo” at http://www.bankinginfo.com.my for yourself.

http://biz.thestar.com.my/news/story.asp?file=/2009/5/9/business/3868107&sec=business