4 Reasons you pay higher interest on controller loan than bank loan
Every government worker has the option to take loans from his or her bank to be deducted from the bank or to be deducted from the controller. Any loan which is deducted from the source of salary, CAGD, is called a controller loan. The government worker could equally access a loan from a bank which would be deducted from the controller. You can take controller loan from your salary bank or from a different bank. Whenever a government worker accessed a loan from a different bank other than the salary bank, that bank would deduct the loan from the controller.
A customer pays more on any loan which is deducted from the controller (source). While any loan deducted from your salary bank account is lower.
There are five (5) reasons you would pay more interest on controller loans as compared with bank loans.
Reasons why you pay more on controller loans
1. Fees charged by the controller for deductions at the controller as against the bank’s own deductions from your account:
The controller always charges the financial institution for serving them. The controller charges banks for deducting any amount from government staff salary to be given to the banks. The controller charges three percent (3%) of any amount deducted to be given to the banks. However, the banks consider this 3% fee as a cost that must be borne by the customer, since it is the customer’s choice as against the opportunity to deduct from the customer’s bank account without any such cost. Therefore, for any standard interest rate on a bank’s loans, the bank would add that extra 3% fee to be paid by the customer.
2. Delay by controller in sending funds deducted to the banks:
Funds deducted by the controller on behalf of banks do not go directly into the banks’ coffers. The funds deducted by the controller go into a pool account at the controller before disbursement to the various institutions. The funds could be delayed for more than a month before going to the various banks due to the processes involved in reconciliation of numbers and other administrative activities.
The delay of funds at the controller denies the banks the opportunity costs and lost gains that they could generate on the locked-up fund.
The banks therefore factor any estimated lost gain into the interest that the customer must pay.
Loan deduction at bank level is credited directly into the bank’s own coffers and therefore starts generating revenue from it almost immediately. The customer pays lower interest on a loan that is deducted from the bank account because there is no estimated lost gain that must be paid by the customer.
3. Possible upfront fees to initiate the deductions:
Banks must recruit staff to facilitate processes involved in dealing with the controller for deductions to be made or reconciled.
Someone must pay that staff. This will be accounted for in operating costs. It is the customer that must pay this extra cost. And so, you will pay higher interest than someone whose deductions happen at bank level.
It is also possible that extra funds must be paid to controller staff to facilitate or speed up the processes.
4. Perceived higher risk as to why you don’t take your bank loan but prefer controller:
It is a general rule that a customer would opt for a better choice. A customer is perceived to be a high-risk individual whenever a customer opts for the controller loan instead of a bank deduction which has lower interest. It is assumed that you have already exhausted the option for bank deduction.
Anyone with multiple loans is a high-risk individual and must pay the price for it. The financial premium for the elevated risk will be added to the benchmark interest rate.
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