09 April 2024 , 12:48
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Millions of Brits could be paying thousands of pounds worth of interest charges on loans due to a "lack of transparency".
Personal loans are where you borrow a sum of money from a lender and agree to pay it back over a set period in fixed monthly repayments. With the cost of living crisis hitting people's pockets hard, more and more people turned to them last year - with the industry growing by 13%.
With loans, lenders charge you interest as its fee to lend you the cash, so you repay the amount you borrowed plus interest. However, an investigation conducted by MoneyComms for TotallyMoney found that a lack of lender transparency could be costing customers thousands of pounds in interest charges.
Under current regulations, banks only need to provide 51% of customers with the advertised offer. Usually, the representative or advertised rate is just the lowest rate that the minimum percentage of customers will pay. Most of the time customers are not given the advertised rate as they do not have a good enough credit score to get the low rate. This means that those who are accepted could find themselves with a worse deal than the one they applied for.
According to TotallyMoney, for a typical £3,000 personal loan with a subprime 69.9% APR, a lower credit score of around 400-500 could end up adding £2,499 worth of interest over 36 months. This means repayments would total £5,958. This rises to an extra £3,942 for a £5,000 loan, and a massive £13,541 for a £10,000 loan
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Alongside this, lenders are not required to tell you if you will be accepted for a product before applying. TotallyMoney says this becomes an issue if you apply for multiple loans back to back. This is because you have a "hard credit check" conducted if you apply for a loan, which shows up on your credit report.
Hard credit checks remain on your credit report for two years, regardless of whether they're successful, and multiple credit applications can negatively affect your score if they are done in a short amount of time. TotallyMoney found that in the last two years, almost one in three loan applications were declined, which potentially left a negative mark on people’s credit files.
Andrew Hagger, personal finance expert at Moneycomms.co.uk said: "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.”
For those wanting a personal loan ToallyMoney, CEO Alastair Douglas, says Brits should first check their credit report, secondly shop around, and thirdly check their eligibility where they can.
He said: "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.”
“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.”