The usury suspects
Forget interest rates of 16.4% a year – the average credit card charge. Or even 41.2% a year – currently the highest Annual Percentage Rate (APR) on a regular credit card. Forget 183.2% - the APR charged by Provident Financial for its doorstep loans. One institution is charging a lot more. How much? Well, the arithmetic jury’s out with a towel wrapped round its head. But do it one way and it is 13,206% APR. And be as kind as you can and it is 417% APR. Either way a big APR. The upshot is that on a loan averaging £600 over the year the borrower is paying £2500 in charges. And the usurious lender which is making theses charges for loans? Step forward the High Street banks!
Evidence given to the High Court earlier this year revealed that in 2006 there was an average total balance of £600 million in unauthorised overdrafts by customers of the top eight banks and one building society. And they charged their careless – or feckless – customers £2.5 billion for the privilege of borrowing it (www.bailii.org/ew/cases/EWHC/Comm/2008/875.html para 415).
The figures came from the Office of Fair Trading as part of its case against the nine institutions which is currently trundling through the courts. The judge accepted them and the banks did not challenge them.
There is a point of view that if you write a cheque and you do not have the funds to meet it that is no less than stealing. After all you are using money that belongs to someone less without permission. And in some countries (France for example) it would be a crime.
But in the UK the freedom to go overdrawn is a routine part of banking life, encouraged by the banks themselves. And now we can see why. Another way of looking at the charges is that the banks are depositing £600 million of their money with their customers and getting back interest of £2,500 million every year. That is a return of 417% gross interest. Not bad when they pay us 7% at the very maximum. And at the bottom less than 1%.
This does not mean unauthorised overdraft charges are unfair (the OFT will give its formal view on that later this month) or unlawful (the courts will ultimately decide that question). But a return of 417% on capital is more than normally profitable. Or what the dictionary calls ‘usurious’.
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