Gareth Shaw: Get credit where it’s due

Make sure you check the small print and look at your other options when deciding whether you can afford to take out a loan. Picture: Getty
Make sure you check the small print and look at your other options when deciding whether you can afford to take out a loan. Picture: Getty
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Borrowers may be paying more than they budgeted for when going for the best personal loan deals thanks to the growing gap between advertised “teaser” rates and the actual rate offered when they apply, new research shows.

The Centre for Economic and Business Research (Cebr) for Shawbrook Bank found that UK lenders are currently advertising a typical loan of £9,000 at between 2.8 per cent and 4.9 per cent APR – but the average APR actually paid by a borrower is 7.3 per cent.

On average, the gap between the representative rate and the actual rate received was 2.4 per cent, which the Cebr estimates is costing consumers £204 million more than they bargained for every year.

Aside from feeling misled by teaser rates, there are concerns that borrowers may not be able to make an informed decision on the higher rate loan from the outset of the application process.

Here’s how to ensure you are getting an affordable deal and whether a personal loan is really the right option for your borrowing needs.

1. Improve your credit score: If you plan to apply for one of the lowest-rate personal loans currently being advertised, it’s crucial to check your credit report first.

Legally, lenders are required to offer the advertised APRs to 51 per cent of people who apply – and the lowest rates tend to go to the people with the highest credit scores.

So you should make sure your credit profile is in good shape to make you stand out. You can check your credit score for free at the three main credit reference agencies: Equifax, Experian and Callcredit.

When looking over your report, you can also check if there any mistakes that could impact how a lender scores you and take action to rectify them before you apply.

2. Beware of your “footprint”: Often, the only way of finding out the rate you’ll be offered is by making an application.

Before approving a loan, most lenders will do a “hard credit check” on your record. This creates a footprint on your credit report. If you don’t get the rate you expect, you could be facing a tough situation.

A large number of footprints in a short time period may make lenders reluctant to offer you the best rate, or even lend to you at all, as it may imply you’re desperate to secure funds.

This means applying elsewhere could harm your rating and decrease your chances of getting a better deal with another provider – so you might be better off taking the offer you’re given.

3. Get personalised loan quotes: More and more lenders are offering personalised quotes which use a “soft search” that doesn’t register on your credit record.

This could allow you to find out the rate you’re likely to be offered without leaving a footprint on your record. Shawbrook Bank is now pledging to offer guaranteed personalised loan rates to customers before they apply so they know exactly how much a loan costs before they go through the application.

Other lenders which will give applicants personalised quotes without impacting their credit rating include TSB, Zopa, RateSetter and HSBC.

4. Check the small print: It’s important to check the small print before you apply for a personal loan, as there may be quirks that mean you were never eligible for the lowest rate on offer in the first place.

Some providers like Sainsbury’s Bank offer their best rate to customers with a Nectar card, while others like First Direct and Nationwide reserve their top deals for existing customers.

5. Borrow over a shorter term: Personal loans are usually taken out over a set period, from one to ten years.

The longer you choose to borrow money, the cheaper the monthly repayment will be – but you should also bear in mind that you will end up paying more interest over time.

For example, if you took out a £5,000 loan with an APR of 3.4% over five years, you would end up paying £90.69 a month and repay £5,441.40 in total.

However, if you chose to borrow over two years at the same rate, you would pay £146.25 a month and repay a total of £5,265 – which is £176.40 less. So, when shopping around for a loan, it’s important to look at the total amount repayable to see how much spreading repayments out could cost you in the long term.

6. Consider using a credit union: You might be able to get a cheaper loan deal by checking out your local credit union.

Credit unions are owned and controlled by members, so they don’t have to pay shareholders. Loans from credit unions tend to be more competitive than loans from high street lenders on smaller amounts up to £3,000.

Plus credit union loans don’t come with extra charges like penalties for repaying the loan early. To find your local credit union visit: www.findyourcreditunion.co.uk, or call the Association of British Credit Unions (ABCUL) on 0161 832 3694.

7. Work out the affordability: If you’re offered a worse rate than you’re expecting, it may be because the lender is concerned about your ability to pay back the loan.

Work out how much you’d need to repay each month, including the interest, and think realistically about how that would affect your budget – could you still pay if your living expenses went up or an unexpected bill arrived?

If not, it’s worth working out if you could borrow a little less, or hold off on the loan until your circumstances have changed.

You’re likely to be offered a better rate if the lender thinks you’re a sound prospect for repayment.

8. Weigh up your other options: Depending on how much you want to borrow, you could be better off taking out a credit card instead of a personal loan. This option makes sense if you are looking to borrow a small amount of up to £4,999, as everyday loans for this value usually attract higher rates of interest.

With a personal loan, you will always pay interest on what you borrow, have to stick to fixed repayments over a set period of time and you may incur early repayment charges if you choose to pay back what you borrow early.

With a credit card, you can clear the balance every month to avoid interest or go for an interest-free credit card. You’ll have to repay a minimum amount each month but you can overpay without penalty.

Gareth Shaw is head of Which? Money Online