Borrowers are being misled by teaser headline rates on personal loans, putting their financial wellbeing in jeopardy.
Research conducted by the Centre for Economic and Business Research (Cebr) with Shawbrook Bank has found that borrowers do not, for the most part, understand the advertised APRs on personal loans.
Shawbrook are now calling into the question the practice of promoting teaser rates – an introductory cheaper interest rate – that mislead customers into thinking that loans are cheaper than they really are.
The research found that one in five (21%) of successful loan applicants received an APR higher than the initial rate advertised. On average, the loans were 2.4% more expensive. The Cebr estimates this is costing consumers £204 million every year as a result.
Paul Went, product and markets director at Shawbrook Bank, comments: “So-called representative rates are actually unrepresentative of reality for too many borrowers and it has a negative effect on everyone.
“The growing scale and significance of the personal loans market mean that it’s more important than ever to ensure loan applications are as transparent as possible for people. A widening gap between expectation and reality when it comes to loans is bad for all concerned.”
According to data from the Bank of England, there is a discrepancy of nearly 4% between the average APR paid by borrowers and typical advertised rates from providers. This leaves many consumers feeling misled with two-thirds (63%) of applicants expressing dissatisfaction with representative APRs.
Mr Went adds: “The research shows that many consumers feel that the marketing of loans is at best confusing and at worst misleading.”
As a result of the findings, Shawbook has committed to not using misleading teaser rates in marketing its products.