BANKS LOOK AFTER THEIR OWN INTEREST - WHILE FARMERS PAY UP TO 19.75% INTEREST
Pat Comerford an IFAC Accountant for over 15 years and Manager of IFAC Accountants Carlow, outlines his concerns about bank charging practices.
An increase in the banks profits from its Irish Domestic Operations is central in their economic fight back. My concern is that many farmers will end up contributing to the banks higher profits through charges in the following areas:
- Current Account Penalty Surcharges of between 6 to 12%.
- Bank Loan Protection Insurance costs which may be reduced by up to 40%.
Current Account Penalty Surcharge
Bank current account penalty surcharges vary from 6 to 12% and are in addition to the normal interest on overdraft balances. This means if you do not comply with the fundamental current account rule you will be severely penalised.
What is the fundamental current account rule?
The fundamental rule to be obeyed if you wish to avoid the penalty surcharge is:
- Do not exceed the authorised credit limit
How does the penalty surcharge operate?
The penalty surcharge rate is the rate charged on the amount by which you exceed your authorised limit. This penalty rate is in addition to the normal current account rate.
Set out below are recent quotations obtained from 3 banks for the standard overdraft rate on authorised balances, the surcharge rate on unauthorised balances and the resultant total interest cost on the unauthorised balance.
| Quoted Standard Rates for: | |||
| Bank | Authorised Overdraft Balances | Surcharge Rate on un-authorised overdraft balances | Total Interest charge on un-authorised balance |
| A | 7.95% | 12% | 19.95% |
| B | 8.55% | 9% | 17.55% |
| C | 9.45% | 6% | 15.45% |
The surcharge rate is charged on the amount by which you exceed your authorised limit.
Example:
Jack has an authorised overdraft balance with Bank A of €30,000 which was exceeded by €20,000 at various times during the year.
Bank interest is charged on the authorised overdraft balance of €30,000 at a rate of 7.95%.
The interest charge (including the surcharge) on the €20,000 unauthorised overrun is at a yearly rate of 19.95%.
How does the 19.95% rate compare with cost of money to the banks?
Most of the money lent by banks is sourced at the three month Euribor rate which at time of writing is 1.05%. In the above example Jack pays 19.75% on €20,000 which is costing the bank somewhere in the region of 1-2%!!
Additional Bank Charges and Fees where authorised limit exceeded
In addition to the penalty surcharge of between 6 and 12% referral charges are imposed for each and every transaction when the limit is exceeded and possibly also a daily charge if there is not enough money in the account to pay direct debits, standing orders or cheques.
How you can avoid falling into the surcharge and additional charges trap
The way you manage your current account and communicate with your Bank Manager will generally determine the rate of interest you pay and your prospect of success will be improved by managing your current account in a businesslike manner on the following lines:
- Protect your current account facility into the future by ensuring you have money in your current account for at least 30 days during the year
- Prepare a simple cash flow for the year showing projected cash inflows and outflows. This will show you when you are most likely to exceed your authorised limit.
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To reduce the risk of you exceeding the authorised limit pursue the following:
- Would other family members be prepared to loan money at say 4-5% for temporary cash injection? They may be receiving less than 1% deposit interest from the banks.
- When meeting with your bank arrange a temporary additional overdraft facility for unforeseen payouts/income reduction.
- The establishment of other lines of credit may be necessary e.g. Stocking Loan, Term Loan etc. to take pressure off your current account at vulnerable times.
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If current level of bank repayments is problematic place the following on the
agenda for the meeting with the Bank Manager:
- Availability of interest-only payments on Term Loans until farm produce prices improve?
- Where a number of Term Loans exist, can they be re-structured into one over a longer period to reduce the level of current monthly repayments?
- Establish on-going channel of communications with your Bank keeping them informed of what is happening - a good relationship with your Bank Manager is vital.
Avoid having your authorised overdraft limit reduced.
If you are consistently exceeding the authorised overdraft limit and your current account is not in credit for at least 30 days during the year it is likely your authorised overdraft limit will be reduced and this will magnify your problem as it will be more difficult to remain within the reduced authorised limit. Protect your current account authorised limit by managing your current account in a businesslike manner.
BANK LOAN PROTECTION INSURANCE COSTS
Banks insist on Loan Protection Insurance for which you have to pay and conveniently volunteer to provide this cover without any reference to competitive cost. The difference between the cheapest and dearest quote for a 40 year old seeking life and specified illness cover on €250,000 (reducing) over 20 years is:
| Cheapest | Dearest | Yearly Difference | Difference over life of loan |
| €1,416 | €2,033 | €622 | €12,440 |
Even greater savings can be effected if you have a number of policies covering loans taken out at different times. Consolidation of existing policies may effect a further saving as the cost of Mortgage Protection Life Cover has fallen significantly in recent years.
Have an independent financial review of your existing life insurance costs carried out.