Loan applicants misled by ‘teaser’ rates
PERSONAL loan applicants feel misled by the ‘teaser’ rates of lenders, research claims.
A report by personal loans company Nava and the Centre for Economics and Business Research (Cebr) found many borrowers are paying almost double the rate advertised.
The report used data from the Bank of England and the Office for National Statistics, as well as a YouGov survey of more than 2,000 adults.
The average loan rate advertised online by the biggest banks and building societies is 3.5 per cent, but the average effective interest rate on a new personal loan is almost double that at 6.9 per cent, according to Bank of England data analysed by the Cebr for the study.
Read more: NACFB gives green light for P2P loans
More than three quarters of the survey’s respondents who were quoted a higher-than-advertised interest rate on a loan said they felt misled.
The report also revealed that many borrowers do not understand the impact a failed loan application can have on their credit rating.
Just a fifth said they understood credit ratings and their effects on credit applications completely, while a further quarter of individuals said they did not understand credit ratings very well or at all.
Of those surveyed who have had a loan application rejected in the past, 42 per cent said that their cash flow problems worsened as a result, while 34 per cent said they were forced to use an alternative lender charging a much higher rate of interest.
Read more: Zopa becomes first UK P2P lender to reach £2bn milestone
Abhai Rajguru, co-founder of Nava Loans, said the report showed 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,” he said.
“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.”
Scott Corfe, director of the Cebr, recognised that lenders only have to offer the advertised rates to 51 per cent of applicants, but said the differences in rates advertised and offered was a concern.
“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,” he said.
Read more: The top IFISA rates
