Borrowers are paying hundreds of pounds extra in loan repayments because they are not getting the advertised rate, new research reveals.
Some borrowers could be paying up to two and a half times the headline APR rate advertised by some personal loan lenders, according to analysis conducted by the Centre for Economics and Business Research (Cebr) for Shawbrook Bank.
The research reveals that the average representative APR advertised by UK lenders for a typical loan value of £9,000 ranges from just 2.8% to 5.5%.
However, the average APR paid by borrowers for a fixed rate personal loan is 7.0%. This means borrowers could be paying up to 150% more in loan servicing costs than initially expected.
The discrepancy between the interest rates advertised by lenders and the rates being paid by consumers has widened significantly since 2011 – growing from 1% to 3%.
Average advertised interest rates versus the actual rates borrowers paid
Source: Bank of England, February 2019
The Cebr estimates that taking out loans with interest above the advertised rate is costing borrowers £194 million.
Paul Went of Shawbrook Bank says: “The gap between consumers’ expectation and reality when it comes to the cost of personal loans continues to be fuelled by the practice of ‘teaser pricing’.
“The lack of transparency surrounding the loan application process is not only confusing to some consumers but in certain cases could be costing them money.”
Why teaser rates are a problem
While the majority of borrowers can expect to get the loan rate advertised, providers only have to give 51% of customers the rate they initially applied for.
This makes it more difficult for people to take an informed decision about the loan they are applying for, as many may not get the rate that was advertised.
Borrowers could also end up paying more in interest and having to make larger loan repayments than they initially thought.
Shawbrook Bank is urging the industry to consider the impact of using teaser rates to hook consumers into applying for a loan.
Mr Went adds: “Collectively, households in the UK are paying millions of pounds more in loan servicing costs than initially expected.
"The disparity between representative APR rates advertised by lenders and the APR actually paid by borrowers shows no sign of relenting and consumers should be wary of this when applying for a loan.”
How to get a better rate
One of the reasons customers often do not get the advertised rate is because their credit score is not good enough.
A higher credit score will increase your chances of being accepted and ensure you don’t end up paying a higher APR rate.
Check your credit score
Checking your credit score will give you an indication of your likelihood of being accepted for a loan.
Fortunately, you can check your credit report and score as often as you like and it won’t affect your credit rating.
It is important to check that your credit score is accurate as mistakes can sometimes be made that can affect your application.
Lenders will search your credit report when you apply for credit – known as a hard search – which can leave a record. If you get a quote a footprint can also be left on your file.
Too many hard searches by lenders can affect your credit rating and lower your score.
Using a price comparison website you should be able to test your eligibility for a loan using a 'soft search' tool which won’t leave a mark on your credit file. Some banks also offer this service, including Shawbrook, TSB and HSBC.
Improve your credit rating
Skipping payments on your credit card, applying too often for credit or even being late on your mobile phone bill can all negatively affect your credit score.
So it is a good idea to pay off any existing debt before applying for a new loan.
It is also important to make sure you pay your bills on time as this will show you can manage your finances effectively.
Stability plays a huge role in determining your credit score. A borrower that has been in the same address will score more highly, so make sure you keep this in mind when applying for credit.
Your credit score can also be affected if you have had a joint account with someone as it creates a financial link between the two of you. If your partner or ex-partner has a bad credit record, you could have problems as well.