It’s not fair to tease about cost of loans

BORROWERS are being misled by ‘teaser’ rates on personal loans, a new report reveals.

People don’t understand that the APRs advertised for loans are not the exact interest rate that everyone will receive.

The reality is that lenders only have to give 51% of successful applicants the advertised rate – the other 49% are at risk of being charged much higher rates and paying far more than expected.

Research from Shawbrook Bank and the Centre for Economics and Business Research shows one in five of those who took out loans during the last two years ended up with an interest rate higher than the one advertised, at an average 2.4% more.

Based on the total value of loans issued in the UK over the last year, estimated to be £40billion, that difference in rate will have cost borrowers £204million extra.

Bank of England figures show the average rate consumers are paying on a fixed-rate loan is 7.3%, but the current advertised loan rates of 13 leading banks on £5,000 borrowed over two years is as low as 3.4%.

On a larger £10,000 loan the interest rate is even lower at 2.8%.

Two thirds of people who have applied for loans feel dissatisfied with the way that representative APRs are being used to advertise personal loans.

Four out of five people expect to get the advertised rate.

This lack of transparency makes borrowing cash harder than it needs to be. People will find it difficult to make an informed decision about whether they can afford a loan when applying if they don’t know the rate of interest they will pay until they are in the application process.

This could mean people apply for a loan that is larger and with higher repayments than they would have otherwise considered.

Shawbrook is worried this could lead to an increase in the likelihood of people defaulting on repayments – since early 2016 default rates on loan repayments have been increasing.

It is questioning the practice of using ‘teaser’ or ‘representative’ APRs to lure in borrowers.

The rising cost of living and stagnant wages is forcing many people to turn to personal loans and other forms of borrowing to help make ends meet.

In February this year the amount we owe in unsecured lending hit a staggering £209billion, up from £196billion at the same time last year.

With so many turning to loans it’s vital they get clear information on the cost of borrowing at the start of the process so they don’t end up in unmanageable debt.

Paul Went, product and markets director at Shawbrook Bank, said: “The research shows that many consumers feel that the marketing of loans is at best confusing, and at worst misleading.

“So-called representative rates are actually unrepresentative of reality for far too many borrowers and it has a negative effect on everyone. We believe that’s the wrong way to do things.”

Lenders only have to give 51% of successful applicants the rate that is advertised, and 49% risk paying more