Millions of UK residents are potentially shelling out thousands in loan interest due to an apparent “lack of transparency”. Personal loans, where individuals borrow a specified sum and repay it in fixed monthly instalments over an agreed period, have seen a surge in popularity amidst the cost of living crisis, with the industry growing by 13 percent last year.
The catch with loans is that lenders charge interest as their fee for providing the funds. The borrower then repays the loan amount itself, alongside this additional interest.
Yet, a probe led by MoneyComms for TotallyMoney has suggested that the absence of full disclosure from lenders could be resulting in customers paying thousands more in interest than necessary.
Current standards dictate that banks only need to offer the advertised deal to a mere 51 percent of their customers. Thus, the representative or advertised rate often simply reflects the lowest rate that the minimum percentage of customers will ever pay.
Because many customers don’t possess the requisite credit score to qualify for these low rates, they are not granted the advertised rate. Consequently, those accepted for loans may find themselves stuck with a raw deal, inferior to what they initially applied for, reports the Mirror.
According to financial experts at TotallyMoney, borrowers with a lower credit score in the 400-500 range could face staggering interest costs on personal loans. For instance, a £3,000 loan at a subprime APR of 69.9% could accrue an additional £2,499 in interest over three years, bringing total repayments to £5,958.
The situation worsens with larger sums: a £5,000 loan could attract an extra £3,942 in interest, while a £10,000 loan might see a borrower paying back an eye-watering additional £13,541.
Moreover, lenders are under no obligation to inform potential borrowers of their chances of acceptance for a financial product prior to application. This poses a problem, as per TotallyMoney’s findings, when individuals apply for several loans consecutively.
Each loan application triggers a “hard credit check” that is recorded on your credit report.
These hard credit checks can linger on a credit report for two years, irrespective of the application’s success, and a flurry of applications within a short timeframe can be detrimental to one’s credit score. Research by TotallyMoney has revealed that nearly one-third of loan applications were rejected in the past two years, potentially leaving a negative imprint on applicants’ credit histories.
Personal finance guru Andrew Hagger from Moneycomms.co.uk commented on the issue, stating: “It’s only when you see the extra financial burden in terms of pounds and pence, for having an imperfect credit record that the importance of protecting your credit file and score hits home. Struggling to cope with high borrowing rates can lead to a spiralling debt situation that’s difficult to escape from unless you’re very disciplined with your budgeting.”
“If you’ve had credit issues in the past, lenders will assess you as a higher risk of defaulting and hike the price of their products to reflect this it may seem unfair but it’s the harsh reality when it comes to borrowing money.”
Alastair Douglas, CEO of TotallyMoney, has some advice for Brits seeking a personal loan. He suggests firstly checking your credit report, secondly shopping around, and thirdly checking your eligibility where possible.
Douglas stated: “One in five people lack confidence in making financial decisions – but checking your credit report can give you the boost you need to move your finances forward. It’s free to do, and you’ll have access to your own personal data – the same information that banks use when choosing who to lend to. Our data shows that people who check their report have a better score, meaning you’ll be in a better position when you apply for credit.”
He added: “Worryingly, one in three people who applied for a loan last year didn’t shop around, with one in ten saying, ‘I didn’t think I would get an account elsewhere’. This means millions might have missed out on the best deals, and instead may have taken something out which could cost them much more in the long run. When it comes to finances, loyalty doesn’t pay. So always do your research on what else is out there – and that way you can find the best offer for your own personal needs.”
“Finally, before applying for any credit card or loan, check your eligibility, or even better look out for offers which come with pre-approval. That means, if all the information you’ve provided is correct, you’re guaranteed to get the offer, meaning you can avoid being declined, and protect your credit file.”
