The following is a request to a bank asking them to stop using compound interest loans. My initial request to the bank said there was nothing wrong. I then went to the Australian Financial Complaints Authority (AFCA) and raised a complaint. The Bank discussed my issue with me, and after some discussion, I sent the following. I am now waiting for their response.
Refer to "Automatic Transactions on Credit Card Account" in spreadsheet illustration
The bank processes two transactions every month without any manual intervention.
The first transaction increases my credit card account and says it is payment of interest the bank has earned by lending. The bank takes the money and transfers it to an account in its books.
Later in the month the bank takes an amount it specifies as my minimum payment of interest plus return of capital. The interest is the same interest I paid previously plus interest on the interest.
The Balance in my account is now $7,311.67. I have paid the interest twice, and one of them has not been deducted from my account.
The rationale is that the first one is money the bank earned and it was earned because I had agreed to it.
However, if the two automated transactions that the bank makes were made on the same day and divided between the two, then the result would be
See - "Requested Transaction Changes on Credit Card Account"
The balance of the account is -$7,177.91 whereas when it is on two separate days it is -$7311.67.
The bank charges both the interest and the capital on the same day when the customer agrees to repay them in total each month and the bank does not make the first transaction on a given day.
My first request is that the bank not make the first transaction automatically, as it is unnecessary, but divide the automatic payment from another of my bank accounts into two transactions. One is the payment of interest, and the other is the repayment of Capital. The bank already does this for people who pay off all their balances, and there is no reason not to do it with people who do not pay off the whole loan amount.
My second request is that the bank acknowledge that it has charged me interest twice during the financial year 2023 to 2024 and informs me of the total extra paid so I have evidence to take to the ATO of this extra charge.
My request turns compound interest into simple interest, where the interest payment is deducted from the balance. Compound interest does not deduct interest payments from the amount owed and is clearly incorrect, as shown above.
Nowhere has the bank stated that it will charge me twice for interest, and if it continues to do so, I would request that it notify me of the actual interest payment and notify all others who pay double interest.
I would note that an effective 40% compounding interest is likely to be considered predatory lending when there is a clear way the bank can stop the predation.