New research suggests that personal loan borrowers are often paying double the average APR advertised by lenders.
A new report co-authored by Nava, a new consumer lending platform, and the Centre for Economics and Business Research (Cebr), reveals the average loan rate advertised online by the biggest banks and building society is 3.5% yet according to the Bank of England the average effective bank & building society interest rate on a new personal loan is almost double that at 6.9%.
‘The Perfect Borrower?’ study which draws on official data from the Office for National Statistics (ONS), the Bank of England and a YouGov survey of over 2,000 adults also shows that a large number of borrowers feel misled as a result. Over three quarters of those quoted a higher-than-advertised interest rate on a loan stated that they felt very (32%) or fairly misled (44%).
20% said they understood credit ratings and their effects on credit applications completely, a further quarter of individuals either did not understand credit ratings very well (19%) or said they did not understand them at all (6%).
Not being able to access credit can have significant implications for individuals. For those surveyed who have had a loan application rejected in the past, 42% say that their cash flow problems worsened as a result, while 34% said they were forced to use an alternative lender charging a much higher rate of interest. This experience is not just confined to those on lower incomes either with 22% of ABC1s having experienced the problem.
Abhai Rajguru, co-founder of Nava Loans, said: “The Perfect Borrower? report is conclusive proof that many borrowers feel misled by the way established lenders advertise their loan rates. Representative ‘teaser’ APRs are seen by many as a useful tool to compare loans. However, in practice, they aren’t working for consumers. Instead they are used by lenders to market products and set unrealistic expectations on pricing which can have a negative impact when people apply and don’t get the APR were led to believe they would. Rather than helping borrowers to make decisions, it’s hindering them by creating a lack of clarity which leads to confusion.
“Of course teaser pricing has been used in other industries. Budget airlines like Ryanair and EasyJet have employed it to good effect. However, booking a flight is not the same as applying for a loan. Teaser rates set unrealistic expectations and clarity is all important when committing to a vital financial decision.
“For that reason at Nava we eschew teaser rates. By using our unique and experienced approach to assessing the credit worthiness and affordability of individuals we will be able to offer tailored interest rates to support the huge number of underserved mainstream borrowers.
“Many of these mainstream borrowers are currently let down by high street lenders and forced into the arms of alternative providers meaning they are getting more punitive rates and often a worse deal as a result.”
Scott Corfe, director at Cebr, added: “Our research shows a big disparity between the interest rates consumers face on their loans, and the rates that are being prominently advertised online and on the high street. The reality is that lenders only have to offer advertised deals to 51% of successful applicants. Ultimately, lack of transparency about interest rates can undermine trust in financial services, and our research shows about a quarter of households feeling more negative about taking on credit than 10 years ago.”
