The rate of wear is a maximum limit beyond which loans are abusive. But with low rates, current wear rates are also down. The professionals are worried.
The rate of wear, a standard that protects borrowers
The rate of wear is a rate set by the bank to protect consumers. In this case, this is a rate that lenders can not exceed in their credit offers. If the limit is exceeded, the credit professionals expose themselves to legal proceedings.
The ceiling is fixed each quarter. For this purpose, the bank collects information from a representative sample of credit institutions. Calculating the average of the effective aggregate rates (APRs) of loans issued in the previous quarter. After weighting, this average is increased by one third. There are several rates of wear for real estate loans, consumer or business. Depending on the borrowing period, the ceiling will also vary.
Lenders demand a floor level for the rate of wear
But with the exceptional drop in 2016 rates and keeping current rates low, the attrition rates have also declined. With low wear rates, representatives of credit institutions sound the alarm. According to them, a low rate of wear and tear limits loans to the most precarious banking profiles. The distribution of the loans would thus be reserved for safe borrowers.
To support their point, professionals believe that it is complicated to establish an offer incorporating the nominal rate and ancillary costs (guarantees, insurance, broker) without the APR exceeds the rate of wear. Professionals in real estate and consumer finance are pushing the point by saying that this situation favors the adage “We only lend to the rich”.
To avoid this pitfall, credit specialists ask that the calculation of the rate of wear be revised or even create a floor level. With such a revision, the spirit of the wear rate would change radically.