Challenging unfair loan charges Hidden charges
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This article, Challenging unfair loan charges, was last updated on 12 July 2010 and is now out of date and held in our online archive for reference. Explore our latest Money articles.
Charges that might once have been minimal may have now snowballed to thousands
If you took out a loan in the eighties or nineties and opted to have any extras, such as legal or broker fees, added to the loan then you could have a hidden debt which you are entirely unaware of - a scary thought.
This is because many smaller lenders offering secured loans at that time would add these extras onto the loan, and give the borrower the option of deferring the repayment of those fees until a later date – usually when the loan matured.
While lots of lenders still give you the option of adding fees and other charges to your loan or mortgage, the difference is that these fees are not being deferred. Instead they are added to the loan amount and taken account of in the monthly repayment, meaning that the fees are paid off at the same time as the loan.
As a result, any borrowers who took out a loan with deferred fees twenty years ago could have been unwittingly accruing further debt by way of compound interest, even if the original loan has since been paid back.
The snowball effect
Interest will be charged on the fees at the same rate charged on the actual loan. And to make matters worse, it is 'compound interest'.
Compound interest works as follows; after the first month, any interest which has been accrued is added to the debt, thus increasing it. The next month, interest is charged on the new higher amount and is again added, increasing the debt still further.
Each month the interest owed on the debt grows, and as it is charged on the current debt rather than the initial amount, the rate it is increasing at is much faster. This is despite the fact that all the while the borrower is paying back the money initially loaned to him or her.
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