A damning report on personal loans yesterday found families face a staggering £400 million rip-off from the ‘broken’ market.
Banks are damaging borrowers’ credit ratings by refusing to say what interest rate you’ll receive until you’ve applied and are using ‘underhand tactics’ to hide loan penalties, says Paul Pester, the boss of TSB.
Calling for rival banks to clean up their acts, he says: ‘I was genuinely shocked and amazed to discover the underhand tactics employed by loan providers.
There is an underlying culture in banking where they just don’t think about the customer.’
Families face a staggering £400 million rip-off from the ‘broken’ loan market with banks refusing to reveal rate and using ‘underhand tactics’ to hide loan penalties
Here’s how you can beat the traps:
DO YOUR HOMEWORK BEFORE APPLYING
Your first step should be to check your credit rating. Whether you are buying a car or improving your home, banks will use your credit score to work out if you are a safe bet.
If there’s an unresolved issue — a missing address or an unpaid bill — it could scupper your chances before you’re out of the starting block.
Banks use credit reference agencies to look at your bank accounts, loans, credit cards and mortgages.
If you know which bank you are going to apply with, check which credit reference agency it uses at moneysaving expert.com/credit-cards/credit-reference
If you don’t, it is worth checking with the three main credit reference agencies — Experian, Equifax and CallCredit.
For a full report you can pay £2 or sign up to a free 30-day trial (remember to cancel to avoid the fee of up to £15 a month).
The next step is to find out which banks will accept you. Use an ‘eligibility tool’ on a price comparison site such as TotallyMoney.com or MoneySavingExpert.com.
It will tell you your percentage chance of being accepted by each of the main loan providers.
>Worried about your credit rating? Learn how to check, improve and potect your score
GET A ‘SOFT’ QUOTE FROM YOUR BANK
Now you’re ready to find out how much interest banks will charge. Banks only have to offer 51 pc of customers the advertised rate — which means that half of us are charged more.
The average borrower pays twice a typical advertised 3.5 per cent APR on a loan of £7,500 to £10,000, according to the Centre for Economic and Business Research. Someone borrowing £5,000 faces rates of up to 13.9 per cent, the researchers found.
Traditionally, banks tell you what you’ll get after you formally apply for a loan and a ‘hard’ credit check has been done.
This leaves a footprint on your credit rating, making you less attractive to other lenders.
Some lenders offer so-called ‘soft’ quotes before you apply. This means a bank will examine your credit rating and tell you whether you are likely to be approved and what interest rate you will be offered — without leaving a mark on your file.
If you have a current account with a major bank, approach them first for a personalised quote.
The Big Four — Barclays, HSBC, Lloyds (including Halifax) and Royal Bank of Scotland (including NatWest) — offer existing customers a soft credit check.
HSBC also offers loans, and soft quotes, to non-customers.
SHOP AROUND — IN THE RIGHT ORDER
The big banks may not offer the best rates — so shop around. TSB and Sainsbury’s offer the cheapest rates for borrowing £10,000 over three years at 2.8 per cent typical APR.
But while TSB offers a soft quote prior to application, Sainsbury’s does not. Other banks offering soft quotes include Nationwide, RateSetter, Zopa and Ikano.
Once you know the rate you can expect and whether you are likely to be approved, you can decide whether to go for a top deal that requires a hard credit check.
These include Yorkshire Bank, M&S and Cahoot, which offer competitive rates of 3 pc on £10,000 over 36 months. Santander offers 3.1 per cent and Tesco and AA offers a typical 3.3 per cent.
Top deal: TSB and Sainsbury’s offer the cheapest rates for borrowing £10,000 over three years at 2.8 per cent typical APR
CHECK FOR SMALL PRINT CATCHES
Before you sign, check the small print: the cheapest rate is not always the best deal.
If you need the cash fast, check how quickly a lender will put the money into your account as this can vary. TSB says that many banks hide details of how soon you can get the money.
More than half of banks will charge you if you want to overpay some months.
Almost two-thirds charge a fee if you want to pay off the loan early.
These crucial details can be buried in the terms and conditions. Money Mail found that while Yorkshire Bank, TSB and Co-op clearly state on their loans homepage that early settlement charges can apply, Sainsbury’s puts these details in its ‘tools and guides’ section.
Tesco displays it in its ‘making repayments’ section.
Check whether your lender offers payment holidays. This lets you delay a monthly payment if you need to.
SWITCH TO A CHEAPER DEAL
If you have an existing loan, you may be able to get a cheaper deal elsewhere — either because rates have fallen or because your credit rating has improved.
But switching a loan is harder than moving your current account or energy provider because you must convince a bank to give you a second loan, increasing your debt, so you can pay off the original one. There may also be early exit fees.
‘Check that your new loan is over the same time as you have left on the old loan to avoid rolling up your debt over a longer period,’ says Brian Brown, at comparison site Defaqto.
‘And crucially, check the new deal will be cheaper overall once you take into account exit fees.’