There is a case in Finland at the moment where a bank has potentially misrepresented itself in a contract regarding their loan collar offer. Or, people have misunderstood what is actually happening. There is still some ambiguity on which, but at the very least, there is an error in the contract offer (not the contract signed) and what people have understood.
Essentially, customers were told that they would have a capped loan repayment amount, without understanding that it is roof on the interest amount. I spoke about this in this post the other week, so will steal the image from there.
What people have understood is that their total loan amount isn't going to change, so if they bought the collar for the next ten years, they would pay the same monthly amount. But, this is not the case when the cap is on the interest rate, because as the reference rate changes upward, the repayments will increase, but only so far. The "security" is in the upper limit, not the initial monthly payment. This means that the "maximum reference rate" is the thing that matters, and this is going to change depending on when you are applying for the loan.
Using mine as the example, it shows the maximum reference rate is 1.2%. At the time I took the loan, the 6 month Euribor was something around 0.65%, because it was just prior to Covid. At that point, I would pay slightly more than the reference, but know the upper ceiling was very manageable. However, the current collar for the same package (12 month Euribor though) has a maximum reference rate of 4.5%, almost 4x what mine is now. But, the actual reference rate is 4.078%.
Taking the Collar is a "bet" on whether the interest rates are going to go up or down, but the cost of that bet can change significantly. When we took our loan, the cost of taking the bet was something like 0.1% on our loan at a time when interest rates were incredibly low. The bet was very cheap to take. However, if taking that same bet now, it could be that rates fall, but still paying significantly more than if just taking the Euribor rate, due to the percentage fee of the collar.
The banks aren't stupid, they know how the game works, so they are going to look to maximize their profits. Their business models don't align with the financial wellbeing or benefits of their customers, as they are looking to maximize wealth from their customers. It is kind of strange in some way that they are in direct competition with those they serve, especially given the power they have over the economy as a whole.
But while the banks aren't stupid, this contractual misunderstanding does highlight that thousands of people at least, don't have good enough financial knowledge to grasp the concepts, or ask the right questions. There are ways to keep a loan repayment static, but what that does is increase the loan repayment schedule, and it will end up being interest only, adding potentially years to the loan time. Locking in the loan repayment amount, should raise many questions as to the mechanics of what is actually happening, especially in a time like the last couple years with rising interest rates being so visible in the media. And, since the person who highlighted this being a journalist herself, they can't really say they haven't seen the conversations.
Collars are great on a loan, but it depends heavily on the cost of the collar and the time that it is taken. With interest rates expected not to rise much more from here, it may be better not to have a collar on the loan. However, if able to go back in time to pre-Covid, it definitely made sense to get one, as the interest rates were already incredibly low, so the additional cost was insignificant. For example, my wife and I were paying something like 7€ more a month to have the ten year collar, but now it is saving us several hundred two years later. Not only that, it allows us to pay down the principal faster, rather than like many, pay the interest only on the loan.
This is because even though money was cheap for a house loan, we didn't take all we could get, rather, we stayed well within our means, just in case interest rates increased. This was because after over a decade of the lowest rates ever (even minus), there was only one way they could go that would cost us. So, while people took significantly more to get a "better" home, a few years later those same people are struggling because they didn't allow for their future financial situation. One where interest rates are high, inflation is high, energy costs are high, and salaries aren't increasing proportionally.
I feel bad for the people who have misunderstood the concept of what is literally called the interest rate ceiling in Finnish, because they didn't apply it to the interest rate. If
they had called it the repayment ceiling, that might have been different. However, I really hope that the bank is brought into question and either are forced to honor the misrepresentation where appropriate, or compensate those affected.
I don't think banks should be allowed to prey on financial illiteracy, but at the same time, I believe that we should each spend some of our attention to better understand our personal finances and what affects it. At some point, we have to take responsibility and do our own due diligence, but if we don't even understand the terms used, we are going to have a hard time. We should know by now though, we can't rely on having our best interests met, by a corporation who benefits from not meeting it.
Taraz
[ Gen1: Hive ]
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Wasn't there some fuss at some stage about preying on financial illiteracy to trick people into getting bigger credit cards? Maybe this will go the same way eventually maybe one can dream right.
Banks are always marching on people that do not really know what they are sold.
Assets, loans, stocks.
Still, they would say that the customer was warned and it's not their fault.
They were born as a place to help people. They became a trap
It is a bit like those phone companies that prey on old people and sell them plans and connections they don't need and won't use.
Money begets money. Money also begets power. Power is addictive. They will chase every fix they can get.
It always pisses me off how authorities allow banks to rip regular Joes who have no clue what they are signing. I know they should request an expert to review the bank contract before signing but banks should be requested to offer clear info about their products, info understandable by regular users. They just act as "system-authorized" thieves. And of course, it's always the same customers, the most vulnerable the ones who suffer the consequences.
Yes. This is the problem. And then, when the thieves lose their stash to other thieves, those they originally stole from bail them out again.
Yes, that is the worst part.
Several years ago, a lot of spanish families lost their houses because they could not afford to pay the mortgage from a bank they ended up needing a bail out, it came from our taxes. It is just discussing to say the least.
I've always been happy with fixed rate loans. They just make the most sense to me and I don't have to play the game. Some people like playing the game though and my hats off to them. It takes a lot of strategy and foresight to make that all work for you. I've never understood why places don't automatically apply over payments to the principle instead of the interest. I mean, I get they want to make more money, but they know very well that is never the person's intent. At least 95% of the time anyway.
And luck! We were lucky with our collar - the timing worked out. Many aren't.
Ours does. The overpayment comes straight off the principle. Pay 100 more, the principle reduces 100.
Yes, and luck! :) That's cool that yours works that way. It's not always the case. I had friend who had a loan and she always paid extra. Without fail they would always apply it to the interest and she would have to call in and make the reapply it. As soon as she could transfer that loan she did.
The banks are a disgrace but after the crash the Irish public got stung so we are watching them closely now. I saw a Tiktok clip of a guy who went on a variable rate of interest with his mortgage and choose to pay the interest daily so it would not compound over the month. He ended up cutting 15 years off his mortgage. The bank tried to stop him but with variable rates you are allowed to pay whatever you like so his daily routine was walking to the bank. Paying 5 quid off his mortgage every day. Genius.
The recovery has been pretty good, right?
That is awesome!
It reminds me of what happened when they got rid of 1 and 2 cent coins in Australia 25 years ago or whatever. Because they would round up (with cash at the time), people were paying item by item. A hundred items might save them 1-2 dollars :D
On another note. There used to be the opportunity to pay the salary into the mortgage, then use a credit card all month, withdrawing from the loan to pay the card off before interest accrued. It would half a loan. But, many people didn't have the dedication and consistency - so wouldn't pay the card off completely. What they didn't realize was even if there was a dollar left on the card to pay, the entire month of interest would be charged. Many "smart" people got burned. However, those who did it well benefited greatly. Not sure if those loans still exist.
Ha that's funny. It's mad the loopholes people find.
Bank Average Lending Rate
Dear @tarazkp !
I wonder how the loan interest rates in the world I live compare to Finland!
Slightly higher, but not much.
Many East Asians assume that Europe's economy is collapsing.
They believe that East Asia will overwhelm Europe soon!
Depends on what happens in China with companies like Evergrande. Overall though, Europe is currently okay.
Here we see such trend in private banks. They run for profit and sometimes offer customers something that traps people into debt and continues their loan process at compounding rates and basically the banks get the main benefit from this.
Everything a bank does, is for financial profit. They are good at doing it too.
Customers should read what they sign and ask to the officer about term they couldn't understand.
For sure. We got burned on our contract originally and had to fight for it hard a year later. Because of Covid, we were forced to sign quickly on an app, where we could read the contract. We had a physical one and a digital in email too. However, the one in the app was different. We got what we wanted in the end, but it was stressful and happened just after my stroke.
Dang I have a master's in math, and I can't understand these shenanigans here without sitting down and giving it deep thought. I'd just stay away from financial instruments like this one. Maybe the bank should make their customers pass an IQ test before they give loans like this one. The loans do seem likely to fail for a great many unsuspecting people.
It really is hard to beat the bank, which is why it is better not to try, and instead, use them as little as possible.
The many fluctuations in the global economy and inflation make the interest rate useless for citizens and the only winner becomes the bank.
The
housebank always wins.Sometimes bankers are not good enough in their services. But hope soo it's improved in future.
For me, the fixed interest rate is not proportional to the individual’s need to spend as an income, or at least preserving his capital.
This kind of thing is common with all those private banks but I don't think they exist in government banks
They will always want you to take loans or put you in debt
The banks are always trying to make the most out of every single loan. They don't really want to eat the losses from bad loans and there isn't much we can do about it. It's why I don't really try to take out that many loans at all. I do agree that it is confusing for an average retail user though
That is really sad. But banks are really good at maximizing their profits. They pay their actuaries a large amount of money so they don't lose money on loans. Unfortunately they don't really care about the regular people, they even hope people make mistakes. Because if they are financial literate, most people would limit the amount of money they put in banks and look for better investments.
BANKs + Government = Bloody LEECHES
Buck The Fanks!