The internet thinks I’m interested in a loan. I have to say that it is not entirely the internet’s fault; I do spend an inordinate amount of time on my computer searching for loans and loan related sites, it is something of an occupational hazard. So advertisements for loans from a variety of companies constantly appear on the webpages I visit whether in the sidebar of my Facebook page or a banner across an article I’m reading on my local paper’s site.
The crash of 2007-8 caused a slump in the lending market as consumer confidence fell and people started to tighten their belts. As result borrowers have benefited from the price war between competitive lenders. Loans have never been as cheap as they are right now but beware; next to the advertised interest rate inevitably are the dreaded words – ‘representative APR’.
But what do they mean? All advertised loan and credit card APRs are ‘representative’. This means only 51% of successful applicants have to get those rates. So, up to 49% may end up with a more expensive loan than they applied for. Imagine 100 people sitting in a room – each one has applied for a loan of £7500 from the same company advertised at 3.9% representative APR. Of the 100, at least 51 must be offered the loan on exactly the terms advertised, but what about the rest? They too will be offered a loan by the company, after all representative APR does relate to successful applicants but they will be offered the loan at a higher interest rate and there’s nothing in law to cap how much higher the rate offered is in comparison to the representative APR.
So this poses a dilemma for the remainder which could be as many as 49%. They have gone through the process of applying for and been offered a loan. The amount and term is what they asked for just the interest rate is higher. In many cases, the borrower accepts the offer for speed and convenience sake. Although the monthly repayments will be more, the increase does not seem great enough to make it worth the effort involved in shopping around. To take our example, a £7500 loan over 36 months at 5.9% instead of 3.9% only costs a manageable £7 per month extra.
What if you are offered a loan at a significantly higher interest rate, say 12-15% APR or you really want to shop around for the best deal? Unfortunately, the only real way to find out whether you’ll get the advertised rate is to apply but every time you do this it leaves a footprint on your credit file. The credit rating system becomes a Kafkaesque nightmare whereby the very act of having your credit checked negatively affects your credit. Take a walk up the High Street or spend an evening online searching for the best deal and you could easily blow your credit rating without successfully borrowing a penny.
This is where credit unions come into their own; although we also advertise representative APRs we set an interest rate for our loan products and this is the rate we lend at. There may be some variation between products and tiered interest depending on the amount advanced. But you don’t have to apply for a loan to find out what the interest rate is, and you don’t have to risk your credit rating to get a good deal.
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