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If you've been considering debt consolidation to consolidate your debt, one of the biggest threats to the success of your debt management is a sales person who encourages you to borrow more than you need.
In the past, this practice of encouraging people to borrow more than they needed was always suspected, but now all that has changed.
During the past week, leaked documents showing the commission structure offered to salespeople have left two major banks facing acute embarrassment.
The reports, leaked from the Royal Bank Of Scotland and the Natwest, consist of commission tables showing how these large organizations encourage their staff to sell big personal loans, mortgage loans and profitable insurance policies to accompany them.
So what!
These sales people have to learn a living.
But now we come to the important part of the leaked documents. The incentive tables allow them to earn a disproportionate amount of commission for selling larger loans and loans that are covered by insurance.
So it doesn't take a whole lot of imagination to work out that the staff may try to lend you more than you actually need, or get you to take repayment insurance that you could do without.
Just take a look at one of the commission tables;
SIZE OF LOAN (?)/Commission Points Without Insurance/Commission Points With Insurance
20000+ / 270 / 590
15000 - 19999 / 220 / 500
13000 - 14999 / 180 / 430
11000 - 12999 / 165 / 380
9000 - 10999 / 130 / 310
7000 - 8999 / 100 / 240
5000 - 6999 / 60 / 160
3000 - 4999 / 30 / 90
1000 - 2999 / 10 / 35
And their customer service advisors can earn a ?1200 quarterly bonus provided they earn 2700 commission points a week for the three month period and their branch achieves its quarterly targets.
So if they sell a loan without insurance for ?2500 they get 10 points. But if they sell a loan for ?3000 (20% more) they get 30 points (300% the amount of reward points!). So it's certainly in their interests to convince you that you need to borrow more.
But the potential problem becomes even clearer when payment protection insurance is taken into account.
Sales people can earn up to three and a half times more commission points just by getting the customer to take payment protection insurance to cover their loan.
Why? Because in many cases, the banks earn more money from selling insurance than they do from the interest they receive on lending money.
If they sell a ?3000 loan they get 30 loyalty points, but if they manage to tack insurance onto the loan, they gain 90 commission points.
Now let's put that into context. If they want to meet their weekly target of 2700 points, they would have to sell 90 loans of between ?3000 and ?4999 without insurance.
But if they managed to sell insurance with these loans, they would only need to sell 30 of these small loans to meet their targets each week. That's quite a reduction in workload.
And if they managed to increase the size of each loan to ?5000 with insurance (160 points each), they would only need to sell 17 loans each week to meet their commission target.
So when the banks claim that their products are sold appropriately, I don't believe them.
These sales people are trying to make a living and no matter how much integrity they have, these commission tables must be floating around their subconscious thoughts influencing the loans that they try and sell to the public.
And these leaked reports are probably just the tip of the iceberg. Banks and financial institutions all around the world operate using similar principles, so there's no reason to think that other sales people aren't working on a similar commission system.
So when you need to consolidate your debt, take great care. Know how much you need to borrow and don't let anyone "show you how you could borrow more but pay less". Always remember that they may have a commission target to meet.
Work out how much you need to borrow to consolidate your debt and stick to it. If you can do this your chances of financial survival will increase dramatically.
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