Entries from September 2009 ↓

PPI is intended to cover loan repayments and credit card debts in times of crisis such as illness or redundancy thus providing some comfort and piece of mind to borrowers.

Changes need to be made to the aggressive selling of this type of insurance according to the Financial Services Authority (FSA). Over 180,000 complaints have been rejected by companies but 80% of those investigated by the Financial Ombudsman have been up held in favour of the customer.

Some PPI Problems

• PPI can incur very high costs up to 20% of the loan value in some cases.
• PPI can be hard or impossible to cancel.
• Sometimes the policies are bought alongside a loan without the customer being made aware they are paying for this insurance.
• There appears to have been aggressive and mis-selling of PPI
• In some cases all the premiums on say a three year loan were due up front and the cost was added to the loan so customers also paid insurance on top.

How To Deal With PPI Misselling

• If you have had a claim rejected unreasonably then request a review and make a claim via the Financial service ombudsman if still unsatisfied. See: PPI at Financial Service Ombudsman
• If you think there was mis-selling you may have a valid case if you were self-employed or unemployed when you bought cover.
• A claim can also be made if PPI was added to a loan without the salesperson telling you that you were purchasing the cover.
• Making a mis-selling claim if you were told the loan would be refused unless you took out the insurance.
• On future loans consider if you need the comfort PPI may provide or you are just giving the lender higher profits. Check your other insurance that may already give adequate cover like Disability, Critical Illness insurance or Life Assurance.

Your ability to borrow money or borrow money on good terms is influenced by your credit score. This is an amalgam of your history with financial institutions, credit cards, store cards banks and other lenders.

If you never borrow, never get into debt, always repay your credit cards 100% first time then you will not get on the radar of Credit Checking Agencies like Experian and Equifax. At the other end of the scale if you have lots of credit cards, miss payments, have county court judgements, apply for credit and don’t take it up or apply and fail too often then you may end up with a poor credit score.

What Can You Do to Improve you Credit Rating?

• Be aware you are leaving a credit footprint. This financial reputation will stay with you (or at least be accessed by future lenders form checking agencies).
• You can ask the agencies for a copy of your personal credit report to see if there are any black marks against your name for a cost of £2 admin fee.
• Check to see whether any mistakes have crept in.
• Improve your score by making at least the minimum payment on your credit cards
• Check you are on the electoral roll.
• Close any old cards even if they have a zero balance as the ‘facility’ ( possible credit limit) will be used in assessing how much you may borrow from a new lender.
• Use web tools to check you are eligible for good deals before applying. Too many failed applications count against you.
• Lenders prefer people with a history of repaying loans rather than someone who never takes out a loan or credit card.

Other Credit Score Tips

• Be cynical about companies who say they will repair your credit for a fee.
• If you are consistently refused credit there is probably a good reason. Get advice from National Debt line or Citizens advice Bureau.
• Scoring systems are not published and differ lender-to-lender, so just because one company rejects you, it doesn’t automatically mean another will.
• If you disagree with anything on your credit file write to the agency and request it is changed. If they and the original lender refuse to amend your file you are entitled to add your own comments as a ‘notice of correction’.

Interest rates swaps are a way for financial bodies to exchange risk on the movement of interest rates. They were originally designed as a way for firms to avoid exchange rate controls because interest rate swaps can be done in different currencies.

Interest rate swaps are one of the most common type of derivatives and are highly liquid (meaning easy to buy and sell).

The most common type of interest rate swap is a combination of fixed and variable rate payments.

In this example.

Firm A wishes to swap variable interest payments for fixed interest payments. Bank B is happy to pay a variable rate in return for a fixed rate

• Firm A pays a fixed rate to Bank B. (e.g. a rate of 5%)
• Bank B pays a variable rate to Bank A. (e.g. Libor rate + 0.5%)
• A notional amount is decided on e.g. £1m so this will determine the amount of interest paid.

This means that Bank B gets a fixed interest payment of £50,000
Bank A is receiving a variable interest payment which depends on the libor rate

Firm A is paying a constant interest payment.

Firm B is experiencing the risk associated in changing interest rates. The amount it has to pay depends on interest rate movements.
If interest rates increase Bank B pays more to firm A, if interest rates goes down it pays less to firm A

Suppose a firm took out a loan and  had to pay variable interest payments on this loan. The firm would be vulnerable if interest rates rose rapidly. This would increase its costs and could make the firm go under.

Therefore, to hedge against a rise in interest rates, the firm, may seek to enter into an interest rate swap. It would choose a situation where it would receive a variable rate and paid a fixed rate.

Therefore, if interest rates rose it would have higher costs from its loan. But, this would be compensated by receiving a higher variable rate on its interest rate swap. Therefore, if interest rates rose, it would not be as damaging for the firms costs.

In this way an interest rate swap provides  a mechanism for firms (or other institution) to hedge against rising interest rates. Of course, it means they don’t benefit from falling interest rates, but, they have greater certainty over their costs and payments.

Related

• Credit default Swaps explained
• Interest rates explained

Insurance is a means of protecting the loss or costs caused by an event that may or may not happen. Insurance coverage is by a contract in which one party, the insurer, agrees to indemnify or reimburse another, the insured, for loss that occurs under the terms of the contract.

In exchange for payments from the insured, called premiums, the insurer agrees to pay the policy holder a sum of money upon the occurrence of a specific event.

Life Assurance

As an individual’s death is certain or assured to happen then Life Assurance is the phrase used to cover your full life insurance.

• Life assurance provides a lump sum when you die.
• If you die early your family or beneficiary will collect the lump sum. If you live to a ripe old age the lump sum is still paid on your death and can cover funeral expenses, inheritance taxes, mortgage or other liabilities.
• You can nominate who you want to be the beneficiary of the lump sum but this needs to be in accord with your will.
• Life Assurance can be seen as a long term saving plan.  As your policy will be paid out at some unknown future date it always has a value. So the policy can sometimes be sold for a cash value (and someone else takes up the premiums and benefits) or surrendered for a lump sum.
• Some policies have bonuses   added based on performance of the underlying investments. However the cost to the insurer of some people dying earlier than expected has to be set against contributions and the interest/dividends that money makes for the insurer.
• Premiums will reflect the amount insured and the length of time premiums are likely to be collected. Using life expectancy tables insurers work out how much you will pay and give or take growth due to interest that is the amount they will insure you for – you do not get out more than you put in unless you die early.

Term Life Insurance

This is a useful type of insurance against you dying within a specific time or set number of years. It can be used to cover financial responsibilities like the period before your children finish school or to repay a mortgage if you die during the mortgage period. It can be used to create a capital sum to replace your regular income earnt whilst alive.

If the term is short and you are young and fit the premiums will be cheap – most people will never need to claim and that is taken into account when setting premiums.

If you are just protecting a mortgage or debt you can arrange a diminishing level of Term cover  as the debt is repaid in the normal course of events.

There are occasions when life insurance is available or taken out for special reasons. This explores some of those special events.

Works Pension Schemes

Most pension schemes have life insurance provision for ‘In Service Death’ . If you die whilst still employed you get a lump sum equal to a number of weeks or years wages. Check your contract of employment and or pension handbook.

It is a comparatively cheap benefit for employers to offer as they are covering all staff whilst you can only get cover as a one off.

Travel Insurance

It is no consolation to you if you die on holiday but you may want to cover the cost of repatriation of the body. Most holiday insurance will have a life element contained within the policy. You can also be sold one trip life insurance but be wary the cost can be prohibitive and not worth the effort.

Credit insurance

Some insurance is provided by banks or credit card companies to have your debts repaid if you die. It saves the companies taking the money out of your estate and assets after you have gone.

Friendly Societies & Clubs

Small grants for funeral expenses were often part of the membership of clubs and societies. There are also prepaid funeral cost plans.

A Bereavement Payment is a one-off tax-free lump sum payment of £2,000. You can claim it if you were widowed on or after 9 April 2001. You must claim within twelve months of your husband’s, wife’s or civil partner’s death.

advice.org.uk

Joint Life Policies

You can arrange insurance on more than one life. Useful if two people have a joint mortgage or the responsibility for  young children.

Lloyds of London can arrange special insurance via your broker on a host of subjects and risks. This may be useful or appropriate if you engage in dangerous pursuits such as parachuting or motor racing.

Stocks signify you claim ownership to part of a corporation and have the same meaning as shares. More  traditionally stocks referred to government stocks such as long dated bonds. Whearas shares reflected company shares.

However, today the difference between stocks and shares has become less obvious. For example, when people refer to the stockmarket they are primarily thinking about the FTSE-100 or Dow  Jones which trades in company shares and listed PLCs.

A recession is characterised as a period of negative economic growth for two consecutive quarters. In a recession, unemployment will rise, output fall and government borrowing increase.

A depression is a recession much more severe and long lasting. There is no agreed upon definition of a depression. But, generally a depression would have some of the following characteristics.

Decline in output for a prolonged period e.g. greater than 2 years.

A drop in output of 10% or greater.

Unemployment rate touching 20% (rather than the 10% rate associated with recessions)

One popular definition of the difference between recession and depression is:

. “A recession is when your neighbor loses his job; a depression is when you lose yours.”

It was first used in print by Teamsters Union President Dave Beck (1894-1993) It is widely attributed to Henry Trueman who began using it shortly after in 1954.

See also: Definition of Depression

Definition of Gross

• Gross is the total amount exclusive of deductions.
• For example, gross pay, is the total pay before tax deductions

Definition of Net

• Net is the total amount received after subtracting deductions from the gross amount

Difference Between Gross Interest Rates and Net Interest Rates

Gross interest rate is the headline interest advertised by a bank

Net interest rate is the effective interest rate after tax is deducted from the gross rate. It is the rate that will be credited into your account. In the UK, most banks take tax at source.

Difference between Gross Pay and Net Pay

• Gross Pay The headline wage rate.
• Net Pay, this will be your take home pay after income tax and national insurance contributions have been deducted. Other deductions could include union subs and professional indemnity.

Related

• Gross, net and gross AER interest rates

A bond is a type of debt instrument. It is a way for a company or government to raise money by selling, in effect, IOUs.

Bonds work by firms selling a bond for say £1,000. In return the firm agrees to pay back the bond in 10,20 or 30 years time. In the meantime, it will pay interest on this bond of say 5%. The purchaser of the bond, gives the firm £1,000 and in return gets interest payments for the duration of the bond term.

The main difference between a bond and loan is that a bond is highly tradeable. If you buy a bond, there is usually a market where you can trade bonds. This means you can sell the bond, rather than wait to the end of the 30 year period. In practise people buy bonds when they wish to increase their portfolio in that way.

Loans, tend to be agreements between banks and customers. Loans are usually non tradeable and the bank is obliged to see out the term of the loan.

However, instruments such as derivatives and securitisation have made loans more tradeable. Banks are able to pass on the risk of loans to other financial bodies willing to take on the risk.

Related

• Bond Yields and the price of Bonds
• Bond Market and interest rates

There have been some crazy financial conspiracies circulating the internet. Just proving that the internet is a place where anything goes.

1. Financial Crisis started by journalists / democrats who wished to see Barack Obama elected. (think progress)

2. Financial crisis evidence of economic terrorism.

This is patently absurd and and gives the impression the crisis could be precipitated by a few random comments by journalists and oversees terrorist operatives.

In fact the crisis was many years in the making. Starting with economic policies pursued in the Bush, Greenspan era of 2000-2006.

An long boom in houses fuelled by low interest rates and over optimistic analysis of the economy and financial markets. See: Boom and bust in housing markets and subprime crisis for analysis of the long period of policies which led to a boom and bust situation in house prices and mortgage lending.

Once the banks were overloaded with toxic assets and mortgages lenders had no chance of repaying, the underlying fragility of the system meant it was only a matter of time before the markets and banks imploded.

Some have even gone so far as to suggest that the crisis is a result of economic terrorism – with mirky terrorirsts buying and selling to undermine markets. But, this represents only a naive view of the situation. The crisis was based on economic fundamentals not a few foreigners selling shares at the wrong time.

If you are sitting on losses of $600bn, the trigger is almost irrelevant.

• Economic Crisis explained
• What Caused Economic Crisis
• Financial crisis explained