Each year, borrowers appear to be left wondering as to why they have not received the rate which was advertised on the loan they had taken out. At the end of the day, if I have a good enough credit score, I am employed with a good wage and have a homeowner status, then surely I should be receiving the lowest rate going? For many borrowers, it comes as a shock when they receive their ‘SECCI’ or loan agreement and come to learn that the rate they have been charged is not the rate which was advertised to them on the website or the brochure.
An article which was featured on This is Money explains the example of a company director with the highest credit score you could possibly receive (999) who applied for a credit card with the Bank Halifax and was offered 21.9% against the advertised 12.9% rate.
Thus, the question is: if the representative APR for a guarantor loan ranges from 39.9% to 49.9% depending on the lender, then how come some people claim they receive rates such as 43.7% and 52.3%?
Of course, it is logical that lenders will be rewarding those with the best credit scores with the best rates on their products. It is no secret that the stronger an applicants credit score and affordability profile, the more likely they are to receive the amount they want on time. Therefore, having less risk should also lead to lower interest charged on a financial product.
This is, in fact, how credit cards work. You will pay lower rates based on your credit score and some providers operate in this way as well when you are seeking to borrow money. If you have a bad credit score, you can expect to be charged a higher interest rate on loans or on credit cards.
Understanding the Representative APR
It is safe to say it is not commonly known that the representative APR which is advertised is only available to 51% of successful applicants, according to the guidelines of The Consumer Credit EU Directive.
If you think about it, this ruling is justified as it implies that lenders must be dishing out the advertised rate to more than half of the borrowers they end up funding. Furthermore, the ruling means that lenders are not obligated to give you anywhere near the representative APR if you fall into the other 49% of applicants, you could be paying more if they decide that will be the case.
You may also see the phrase ‘typical APR’. This is referring to the rate which must be provided to at least 66% of successful applicants. It is not random, the rate you receive will be based on factors such as your credit score, the length of your loan and the lender’s policy.
You may find on occasion that the APR seems very high on financial products such as payday loans. But this is because the loan is only meant to last a few weeks (until your next pay cheque) and to be expressed as an APR they are compounded multiple times, which in the end, makes them seem higher.
It has been explained by loan providers that some people may not receive the rate advertised because of additional affordability checks. Additional affordability checks include a lender looking carefully at the ratio of your overall income to the debt to see how much you will be able to afford. In order to calculate this, a lender may ask you for your monthly expenses on rent/mortgage, food bill, utility bills and credit cards – they will ask for proof of these with a bank statement.
Loyal Customers are Rewarded
Loyal customers tend to receive better rates. This could be a person who is taking out a second, third or fourth personal loan from the same lender and therefore has developed a good record with the company, coupled with a good credit score still intact.
Did you know you can ask the lender?
If you wish to get further clarity on the issue of not receiving the advertised rate, you are allowed to ask the lender why it is your application was either rejected or given a lower rate than anticipated. As part of the EU directive, you are entitled to request this information and they have to formally write to you.