We've added the option to borrow more on top of your Monzo loan 🧮

[TheoGibson]

On the topic of interest rates it’s worth bearing in mind 2 things:

• These are representative APR’s - which means 51% of customers receive this APR or lower. This means that it’ll be based on both the APR’s of loans on offer and the distribution of loans taken out - the prices for individual customers may be lower or higher.

• APR doesn’t capture the full story because of some sneaky things done by some lenders such that a higher APR may actually be cheaper. The three main reasons for this are upfront fees, early repayment fees and missed payments fees (of which Monzo has none).

For example:

• A £1k loan at 10% APR over 24 months will cost ~£100 in interest.
• If you repay the same loan early at the 6 month point (with no fees) it’ll cost ~£40.
• A £1k loan at 8% APR over 24 months will cost ~£80 in interest.
• A £1k loan at 8% APR over 24 months with an upfront fee of £20 (2% of origination amount) that you repay early at the 6 month point will cost ~£46.

You can then add on £12 for any missed payments and/ or any early repayment fees.

For now, we’re treat new customers the same as existing loan customers in terms of fairness and transparency. All lenders rates will change over time based on a number of factors. We have changed prices since we started offering loans in 2019, so the rate for further borrowing might be higher or lower than your current rate - but we’ll always be transparent, and definitely flag this when the rate is higher. The interest rates offered are something that we’ll continue to evolve and iterate on over time as we gain more data.

Some notable things that Monzo does “do differently” (maybe not to every lender but compared to most):

• You’ll get an automated approval and don’t need to wait around for a manual approval.
• You’ll get the money when you accept the T&C’s rather than the next day or later.
• No missed payment fees, no upfront fees and no early repayment fees.
• You can see your live balance in the app at all times and make additional payments whenever you want.

Also don’t get me wrong - there are things we’d love to (and will) improve even further such as paying your monthly payment from a pot but we’ll get there in time. If you have other things we can do to improve the product and experience (especially in relation top ups as this is a new feature), we’ll try to take the feedback on board!

[Jays6]

Love it

[N26throwaway (Sir Tom MacMonier)]

@michaelw90

That’s not been their saying for a long time,

Our social programme

At Monzo our mission is to make money work for everyone.

[N26throwaway (Sir Tom MacMonier)]

@TheoGibson

On the topic of interest rates

Excellent post.

Few things.

@TheoGibson

at least 51% of customers receive.

I despise BS like this. It’s not just the banking industry (broadband was particularly dreadful before the regulator got involved; still not great) too, but many others. It’s deceitful and disgusting. Presumably, and hopefully, Monzo doesn’t exploit this like other lenders do? I particularly like how Triodos lend money at the same flat rate to everyone who is eligible.

This element ties quite nicely into this thread on ethics, which is probably where much of this discussion would be better suited:

Monzo's ethics

I was just reading this and thought to myself - phew, lucky I’m not with a legacy bank. And then I realised: I don’t think I’ve seen an explicit statement by Monzo that they don’t do bad things (like investing in fossil fuels etc), and that they are aiming for Net Zero themselves. I don’t even know if they are, I just assumed that aligns with their values. They’re not a member of the Net Zero Banking Alliance, for example (not that that means much). I’ve seen this page, which mentions the Liv…

@TheoGibson

You can then add on £12 for any missed payments

This made me chuckle. Any insight into why it’s always £12?

[lpoolrob (Rob)]

@TheoGibson

On the topic of interest rates it’s worth bearing in mind 2 things:

• These are representative APR’s - which is the APR that at least 51% of customers receive.

Meaning that, realistically, the other 49% will likely pay more. Which means your already high representative APRs are even higher across the whole 100%.

As N26 says, it is totally BS that the banking industry uses to hide behind charging more to almost half the population. It also very much goes against transparency.

I have zero problem with charging what you like, nobody is forced to use you for a loan, but it doesn’t mean you shouldn’t be called out on it.

[AlanDoe (Alan)]

Cleared up quite a bit here from some Off Topic discussion and some clear breaches of the Code of Conduct.

I’ve sorted all that now and the Topic is back to being open for hopefully some level of discourse about the product.

Thanks so much for sharing @DaniShipp and welcome to what is normally quite a friendly Community

[Drew58 (Drew - Joint account feature parity please Monzo)]

I like this idea and think it’s long overdue.

Monzo like any bank can pick and choose which customers it wants to avail credit for.

I do think the charging different rates across all of Monzo credit profile is just like a traditional bank.

Unfortunately not sure from an economic point of view (from Monzo) can they be what they in the early days promised?

I do like banks such as Tridos - if they offer you a line of credit it’s the same across the customers

I have an overdraft with Monzo but can’t get a loan - no point moaning about went elsewhere and got one.

I suppose it’s really early days in reality for Monzo loans and until they can ensure a low bad debt profile it may be difficult to make any positive (customer view) changes.

[Revels]

@N26throwaway

I particularly like how Triodos lend money at the same flat rate to everyone who is eligible.

Are they just super strict about who they will lend to?

So instead of giving “bad” customers the higher rate, they just say no?

[N26throwaway (Sir Tom MacMonier)]

Possibly, but I don’t see why they would be, but then this isn’t an area I know too much about.

In my case, they gave me a £2k one whilst Monzo only offered £500 at 39%, but acceptance has never been an issue for me.

I think responsible lending is more to do with how much you allow to people rather than how how much you can profit from their misfortune. That is, you give a lower overdraft as opposed to a higher rate, and that’s how I’d expect they approach it. In fact, I think that’s how Monzo approach Flex.

Elsewhere it tends to be, same limits, higher rates.

I think committing to a flat rate is a good thing in general though, even if it does mean lending to fewer people. If it’s too risky to lend to someone at 18% then it’s not likely to be responsible to just lend it to them at 39%. That’s what makes the typical approach predatory.

@TheoGibson’s take on this stuff would be very interesting I’d imagine.

[TheoGibson]

The whole interest rate thing is a tough one with a few different angles - I agree - In the interest of transparency/ fairness/ etc. I’d prefer a flat rate but economically it just doesn’t go round on loans because otherwise people will just borrow from a competitor instead.

Putting aside the hidden fees piece that I mentioned above which can significantly change the cost of a loan…

By offering a flat rate - you’re not going to appeal to customers who can get a significantly lower interest rate elsewhere. There will be a range in which customers will chose one provider over the other even at a higher price (eg. due to things like product experience or hidden fees) but when the difference in cost is too big it’s just not going to matter - most will go elsewhere. eg. A 10k loan over 60 months at 5% vs 15% is a difference of ~£2.5k.

On the flip side - you’ll be able to accept more customers if you offer up to 20% vs offering up to 15% - hopefully it’s clear why. So you might say these customers are “too risky” and shouldn’t be accepted - but - if those customers have a borrowing need (which if they’re searching for a loan they probably do) then all they’ll do is look elsewhere - or worse - maybe they’re looking to consolidate credit card debt which is often at 40%+. Note that this is true up to a point and that point may be different for different lenders.

At a flat offered interest rate these two factors compete against each other and mean that variable rates based on risk are just a lot more viable.

There’s an interesting piece with the different economics of different products but I won’t go into this here.

[42644]

@TheoGibson

The whole interest rate thing is a tough one with a few different angles - I agree - In the interest of transparency/ fairness/ etc. I’d prefer a flat rate but economically it just doesn’t go round on loans because otherwise people will just borrow from a competitor instead.

There’s assumptions built into this that I’d love to hear more about. Why are customers who are eligible for the lowest rates elsewhere worth chasing, when the competitors are padding their revenue from these loans with fees / charges that Monzo can’t benefit from? If Monzo can’t compete with these rates, do they have any relevance and do they provide any value when shaping the Monzo product? If I care about minimising my rate, and I can borrow from TSB at 2.8%, why would a 5%, 6%, 7%, 8%, 9% or even 10% rate from Monzo matter?

My own experience with high-street bank loans is that they’re a headache to obtain even in the most ordinary of circumstance, and while progress has been made by high-street banks during the pandemic out of necessity, there’s still a lot of room to make borrowing money a pleasant experience… and that’s what Monzo has done with a “Quick and simple […] All in one app […] Fairer - no fees” approach. I was not price sensitive, and my focus was exclusively on the least headache so Monzo’s value proposition resonates with me and would continue to resonate with me at 10%.

Here’s 2 statements:

1. There is an average rate across all of the loans offered by Monzo
2. Monzo is not competitive with high street banks on rate (i.e: TSB is 2.8% vs. 8.8% Monzo)

If these statements are correct, it seems like Monzo’s big opportunity is to set aside notions of what is or isn’t economical for traditional banks, and instead lean heavily into positioning the loans as radically different (by offering a flat rate for everyone eligible to borrow). After all, low rates from high street banks aren’t fundamental to borrowing, they’re just a marketing tool, half of TSB borrowers are not getting 2.8% but they still borrow. If Monzo can market a loan product without relying on rates, there’s a lot of room to challenge the status quo.

“By taking out a loan through Monzo’s Fair Borrowing™️ program, you’re helping make fair and equal borrowing accessible to everyone. The cost of borrowing is no longer disproportionally borne by the low income, borrowing is a tool for all to better their lives. Help your neighbours, not a faceless executives bottom line.”

I can already hear me and my b-corp-t-shirt-wearing esg-loving middle class millenials stampeding to borrow money in a way that helps make borrowing more accessible to others. A few percentage points higher rate isn’t going to impact me, but a 10% lower rate could really matter for someone else. We already live this ethos in our every day lives through taxation, we happily pay for the NHS!

I’m sure Monzo does more modelling than my human brain can imagine, and that Monzo has a very clear understanding of why a flat rate isn’t viable, so I don’t mean to suggest that people at Monzo haven’t considered this, but your comment doesn’t help me understand why it isn’t possible and so I’d love to hear some insight into the specifics: why must Monzo try to compete on rates (despite not being competitive)? Are there regulations that necessitate the (cost + risk adjusted rate) model, rather than a flat rate? Does Monzo have obligations to lenders that dictate the approach?

If Monzo had competitive rates, I think the conversation would be different, because it would be plausible that an uncompetitive flat rate would drive out the low-risk customers because the rate that they’re sensitive to would be better elsewhere, but given Monzo’s representative rate is already 8.8% I struggle to see a world in which a flat rate of, say, 10%, would drive any cohort away given to be a Monzo borrower they must have already made peace with a rate ~3x greater than that of competitors.

[mop (Mark)]

The functionality and way Monzo enable it is nice. Flex, for example, is a great UX. But these interest rates are epic! 22.8% for up to 7k versus 3.3% with First Direct? Ooof. There’s obviously a reason for these rates (all that debt, perhaps?) but it doesn’t take much shopping around to realise one is being ripped off, and give up on the excellent UX to get a considerably better deal. There are levels of ‘price inflation’ people are willing to pay to ‘support’ a brand they love, but there comes a point where you’d just feel like a mug.

[EdSB (Ed Stuart-Bourne)]

A representative APR of 22.8% on loans up to £7,000 means at least 51% of borrowers get a rate of 22.8% or better. (I didn’t quite get this right the first time round - need my morning coffee…)

We have to show representative APRs on anything that is defined as a financial promotion - this is regulated by the FCA. But we really don’t want to hide behind this at all, which is why we show your personalised APR as soon as we can when you explore a loan, and always before we do a hard search (unlike some lenders).

[EdSB (Ed Stuart-Bourne)]

See my post above on representative APRs - we definitely don’t want to hide behind this, but it’s a regulation to always show a rep APR next to anything classed as a ‘financial promotion’.

On the £12 missed payment fees - I can’t find a source for this, so it could be a folk tale… I was told that many years ago a case went to court about unfair missed payment fees. The judge said in their judgement something along the lines of “you should only charge reasonable fees - say, £12 - when someone misses a payment”, and ever since then every bank has defaulted to £12…

[N26throwaway (Sir Tom MacMonier)]

@EdSB

we definitely don’t want to hide behind this, but it’s a regulation to always show a rep APR next to anything classed as a ‘financial promotion’.

Oh no, I get this. Triodos have to say this as well even though everyone gets the same rate, and MSE poke a little fun at it on their credit club and call the regulation nonsense.

I was more interested in whether or not Monzo exploit this as many other lenders do, in that you’re only giving the advertised rate (or better) to 51% of customers, and the other 49 get lumped with something worse. That’s the practice I don’t like with this, and I’m hoping is something the regulator will eventually address.

From what you say, it sounds like Monzo doesn’t do that, which is great!

[RSheff]

@EdSB

On the £12 missed payment fees - I can’t find a source for this, so it could be a folk tale…

The history of bank charges is interesting but complicated. Back in 2006 the Office of Fair Trading decided that it wasn’t willing to investigate complaints about default bank charges up to £12. All the banks then reduced their charges to £12.

Subsequently, the Supreme Court decided that the OFT didn’t have the authority to decide whether bank charges were fair or not. There have been further developments since then, and the OFT no longer exists, but mostly the banks have stuck to the £12 charges.