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Lawmakers launch war against loan penalty charges

Jan 24, 2014 Philip Burgess

In almost any nation across the world, if you don't keep up with making payments on various accounts, there are going to be consequences. For instance, say you fail to pay your electricity bill for a month or two - chances are good that you're going to be hit with a "failure to pay" charge. You've signed up for a service, so you have to abide by the terms of the contract - it's as simple as that, and companies spell out the results that are paired with not paying.

Consider some of the largest entities that charge these types of fees: banks. If consumers don't follow the rules set by high street banks, they will face the consequences. For instance, if they write cheque​s without having the money in their bank accounts to cover such payments, not only will these cheques be invalidated but they will most likely face overdraft fees as well.

Defaulting and overdraft fees are things that occur when dealing with companies across the world. They are how many businesses make a profit and are able to pay their own overhead and payroll fees. However, in the United Kingdom, some leaders are trying to make sure short term lenders don't levy such fines. They claim that these charges are unfair, but with this practice being the norm across numerous industries, which party is really being unjust, lenders or critics?

Are fees unlawful?
According to The Independent, consumer group Which?, upon issuing a report that revealed 10 out of 17 short term lenders in the U.K. charge a default fee of £20 or more, began questioning whether this practice is legal. The source noted that the organization's legal team is publicly asking whether or not this practice is allowed under the Unfair Terms in Consumer Contracts Regulations 1999.

These laws "state it is unfair for lenders to charge a disproportionately high fee if borrowers default on a loan." However, what Which? didn't specify was how much consumers could take out from these lenders. If the £20 is tacked on to a default on a loan worth thousands of pounds, that's negligible.

"We charge a one-off default fee of £30 on late repayments that reflects the additional costs we incur in collecting these loans," a Wonga representative told The Independent. "This charge has been independently assessed as reflecting these expenses."

However, the article also points out that a number of short term lenders levy a fee of £12, which is the same as credit card companies.

But are banks innocent?
One large question remains: If short term lenders are coming under fire, why aren't other entities, especially banks, being treated to the same nitpicking?

A chart appearing in The Guardian revealed that those who hold a Halifax Reward current account face up to £30​ in authorised overdraft fees, while unauthorised charges go up to £100 monthly. This is the same for those with Santander Everyday current accounts, though the authorised charge falls by £10 in comparison.

In reality, these charges are similar to, if not more expensive than, those levied by short term lenders if the terms of the consumer contract are breached. The only difference is that lawmakers and consumer groups don't seem to be calling these fees into the spotlight.

That being said, because lenders' practices are the ones being questioned, professionals have to stand up for their methods. For instance, because legitimate companies always make sure their clients are up-to-date and in the know about terms, borrowers know what's at stake if they miss a payment - just like they know overdrafting will yield penalties. Moreover, if such charges aren't tacked onto missed loan payments, the lender will run at a loss, affecting its ability to continue operating and paying employees.

If everyone simply remains educated about the terms and conditions regarding any contract, all parties involved will likely be much better off.