<TABLE border=0 cellSpacing=0 cellPadding=0 width="100%"><TBODY><TR>Sep 10, 2009
ADVERTISING EFFECTIVE INTEREST RATES
</TR><!-- headline one : start --><TR>Make it a must, and clearly
</TR><!-- headline one : end --><!-- show image if available --></TBODY></TABLE>
<!-- START OF : div id="storytext"--><!-- more than 4 paragraphs -->IN THE wake of the Minibond mis-selling fiasco, there is now a general agreement that consumers should be as informed as possible before entering into financial transactions.
Given that, I am surprised that there appears to be little regulation in place governing how banks can advertise their consumer loan offerings.
As a result, many advertisements are less than clear on the true cost of taking out a loan and consumers are often given a misleading impression on the real cost and relative merits of competing offers.
The main problem is that many banks advertise their instalment loan products with reference to an interest rate calculated on an 'instalment loan basis'.
This significantly understates the true cost of the loan as reflected in the more meaningful and widely recognised effective interest rate (EIR), which is typically about double the interest rate quoted in the advertisement.
Often, the EIR is included only in the small print of the advertisement, while the advertised interest rate is splashed in bold print at the top.
This is in direct contravention of the Association of Banks in Singapore's Code of Advertising Practice for Banks, which states clearly that 'the EIR must be given equal prominence to the applied interest rate'.
When I told the association that most banks do not adhere to its code, I was informed that the code carries no legal compulsion or implications, and that the association had no powers to ensure that banks followed it.
If the association cannot force banks to follow best practices, then the regulator should consider stepping in.
Perhaps it is time Singapore followed the example of other countries where such practices are not permitted and banks must prominently display the true cost of borrowing, as reflected in an EIR taking into account all fees and expenses (which most banks in Singapore do not take into account when stating the interest rate on the loan).
This will ensure that consumers are not misled on the real cost of taking a loan, and so prevent people from borrowing money they cannot afford to repay.
Stuart Bygrave
ADVERTISING EFFECTIVE INTEREST RATES
</TR><!-- headline one : start --><TR>Make it a must, and clearly
</TR><!-- headline one : end --><!-- show image if available --></TBODY></TABLE>
<!-- START OF : div id="storytext"--><!-- more than 4 paragraphs -->IN THE wake of the Minibond mis-selling fiasco, there is now a general agreement that consumers should be as informed as possible before entering into financial transactions.
Given that, I am surprised that there appears to be little regulation in place governing how banks can advertise their consumer loan offerings.
As a result, many advertisements are less than clear on the true cost of taking out a loan and consumers are often given a misleading impression on the real cost and relative merits of competing offers.
The main problem is that many banks advertise their instalment loan products with reference to an interest rate calculated on an 'instalment loan basis'.
This significantly understates the true cost of the loan as reflected in the more meaningful and widely recognised effective interest rate (EIR), which is typically about double the interest rate quoted in the advertisement.
Often, the EIR is included only in the small print of the advertisement, while the advertised interest rate is splashed in bold print at the top.
This is in direct contravention of the Association of Banks in Singapore's Code of Advertising Practice for Banks, which states clearly that 'the EIR must be given equal prominence to the applied interest rate'.
When I told the association that most banks do not adhere to its code, I was informed that the code carries no legal compulsion or implications, and that the association had no powers to ensure that banks followed it.
If the association cannot force banks to follow best practices, then the regulator should consider stepping in.
Perhaps it is time Singapore followed the example of other countries where such practices are not permitted and banks must prominently display the true cost of borrowing, as reflected in an EIR taking into account all fees and expenses (which most banks in Singapore do not take into account when stating the interest rate on the loan).
This will ensure that consumers are not misled on the real cost of taking a loan, and so prevent people from borrowing money they cannot afford to repay.
Stuart Bygrave
