The facts behind 'low-cost' loans

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A SCHEME to borrow money against the security of a share or unit trust portfolio might seem tempting. But it can be an expensive way to raise cash, writes Sue Fieldman.

Such a scheme is being offered by American European Finance Corporation, of 404/406 Finchley Road, north- west London.

AEFC's publicity material claims that 'our charges are low'. However, that depends what you mean by low.

First, there is a facility fee of 2 per cent of the money drawn down. The minimum amount that can be drawn down is pounds 15,001. Next, there is an initial establishment charge of 1 per cent of the portfolio. The minimum value of the portfolio that will be accepted is pounds 50,000. On top is a monthly administration charge of 0.15 per cent, or pounds 75 a month on a pounds 50,000 portfolio.

Payment of a further fee of 10 per cent of the amount drawn down will provide a non-recourse facility. This means that if the bottom falls out of the stock market, the lender can sell the shares in accordance with the terms of the loan agreement while the borrower would not have to repay any of the loan. But if the loan is 'with recourse', AEFC would look to the borrower for any shortfall.

The loans are set up for a five-year period. The borrower has to continue paying the monthly administration charge until the end of the term, regardless of when the loan is paid off. However, another loan can be taken out during the period with no further charges.

According to AEFC, the interest rate on the loan 'will be as low as 3.5 per cent over clearing house bank base rate or 2.5 per cent over the London inter-bank rate'.

The percentage advance normally available is 40 per cent of the mid-market value of the securities. The share certificates and stock transfer forms are lodged with AEFC as security.

If the share portfolio drops so that the percentage advance is more than 50 per cent of the mid-market value, then AEFC can ask for immediate repayment of part of the loan or ask for more security.

David Sinclair, a chartered accountant and a spokesman for AEFC, said: 'We will treat people sensibly and properly. If we find a situation where they have nothing else to offer at that stage, we have the right to mitigate the loss to the client and ourselves and sell.'

AEFC, incorporated in the United States, is not obliged to have its accounts audited here.