How just applying for a loan puts black mark on your credit score
BORROWERS are getting black marks against their credit record simply because they have applied for a personal loan.
Some of the biggest banking names are penalising customers who make an application but do not go on to borrow the money.
If someone then shops around and applies to several banks for quotes, their credit rating could be quickly eroded. They end up being offered worse interest rates and being forced into higher repayments.
This is because it looks like the customer is desperately applying for multiple loans rather than simply asking several companies for quotes before deciding on a deal.
One estimate suggested the cost of the rip-off to customers is almost £400million a year. The claims are made in a damning report on its own industry by the bank TSB, which alleges the personal loans market is ‘broken’. It accuses ‘ aggressive’ banks of burying crucial terms and conditions about exit penalties and overpayment fees.
And it claims many banks refuse to tell customers what interest rate it will charge them until after they have applied for the loan and undergone a full credit check.
This leaves a black mark on their credit score before the borrower even knows the price of the loan and whether they want to go ahead with it.
Paul Pester, chief executive of TSB, said he was ‘amazed to discover the underhand tactics employed by loans providers’. He added: ‘We just had to blow the lid off this broken market. What other industry penalises you for shopping around?’
Banks advertise a typical annual interest rate on their loans – but only those with the best credit scores will receive this, while others are lumbered with a higher rate.
TSB found almost two-thirds of banks refuse to tell you what rate they will give you until after you apply and undergo a ‘hard’ credit search, which puts a negative mark on your rating.
Banks can conduct a ‘ soft’ search on your credit file so they can give you a personalised quote but many do not offer this. Lenders obtain the same information from credit reference agencies during a soft search but because you are asking for a quote and not formally applying for a loan, it does not permanently mark your credit file. TSB says it is perplexing most banks do not offer this.
The bank says applying for multiple loans to obtain quotes would cause the APR to rise by an average of 1.75 per cent.
This equates to an extra £364 in interest on a £10,000 loan taken out over four years. It estimates this is affecting one million customers a year.
HSBC, TSB and Nationwide all offer a personalised loan quote using a soft search before a hard check is necessary.
But banks including Tesco, Yorkshire Bank and Santander all conduct hard credit checks before they will give you a guaranteed interest rate.
Tesco Bank said it wanted to give customers certainty over the rate. Yorkshire is ‘reviewing how quotation searches can be best employed before an application is submitted’.
‘Blow the lid off this market’