BORROWERS applying for a personal loan are being slammed with a much interest rate higher than advertised – or being rejected altogether.
New research from lender Zopa has found that this is costing customers hundreds of pounds over the length of the loan.
These rate increases can add up
Banks only have to give just over half (51 per cent) of accepted applicants the rate that they apply for on a loan or credit card.
But when Zopa tested this out on 1,000 loan applications, it found that just 35 per cent of people on average got the advertised rate.
While 65 per cent were offered a higher rate or were completely rejected.
And these rate increases can add up – if you apply for a typical £8,000 four-year loan at the average advertised interest rate of 3.4 per cent you will pay back £8,567.
How can I check the rate I might get without hurting my credit score?
THE only way to know if you’ll get accepted for a loan is to apply.
Yet that leaves a footprint on your credit file, and too many of those, especially in a short space of time, can hurt future applications.
This is a catch-22, as if you get rejected, or the rate you’re offered is rubbish, you’ll want to keep applying.
Use a tool that carried out a SOFT search to show your odds of acceptance for a loan without it impacting on your credit score.
You can hone and minimise your applications this way too.
Try this loans eligibility calculator at MoneySavingExpert.com.
But if you don’t get that rate and are offered a higher 6 per cent, you will pay back £9,020 – an EXTRA £453.
What’s worse for customers – is Zopa says it’s nearly impossible to compare loan providers or shop around for a loan.
That’s because the majority of personal loan providers in the UK won’t show customers the actual rate they’ll be offered until they’ve completed the loan application.
The problem with this is that it often leaves a hard mark on the customer’s credit file before they’ve received a personalised quote, which can hit your credit score.
Zopa says 40 per cent of borrowers are unaware of this.
Research also shows loyalty doesn’t pay for people who choose to apply for a loan with their current account provider.
In fact, those banks which offer loans exclusively to existing customers offered them an average rate of 7.8 per cent.
In comparison, the average rate offered to new customers was a much more palatable 5.4 per cent.
How can I boost my credit score?
FIRSTLY, check your credit score.
Noddle gives you free for life access to your score and report.
You can boost your credit score by being on the electoral roll.
Check past addresses and relationships on your file – if you’re financially linked to a former partner, for example you held a joint bank account with an old flat mate where you may have been jointly named on the utilities bills, their credit rating can impact on yours unless you’ve de-linked yourself.
Apply for a credit card if you don’t have a credit score. Be careful, though: set up a direct debit to clear the balance in full each month.
Pay your rent on time – register with free scheme Rental Exchange Initiatve which private renters and social housing tenants use to make paying rent bump up their credit rating.
Cancel unused credit and store cards.
Reduce your debts with savings – too much debt hurts your score.
Remember, this is just a guideline.
This so-called “poverty premium” often sees those on lower incomes paying higher prices for the same goods and services as those who earn more.
Andrew Lawson, at Zopa, the lending firm behind the research, said: “Customers deserve a fairer personal loans market.”
“For most loan customers, what they see isn’t always what they’re going to get, and that’s not right.”
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