It is a common occurrence that borrowers are left wondering as to why it is that they have not received the rate which was advertised by a certain lender whether applying for a mortgage, person loan or payday loan online.
If a borrower has a good credit score, has a homeowner status and is in steady employment, then surely, they should be receiving the lowest of rates? However, for many borrowers, it does come as a surprise when they receive their ‘SECCI’ or their loan agreement to see that it is not the rate on the website or on the brochure. All the Lenders investigates further into this.
In an article written by This Is Money, they tell the story of a company director who has the highest possible credit score (999) when this person applied for a Halifax credit card and they were offered 21.9% against the 12.9% rate which was advertised by the provider. A similar case was written about a woman who had a perfect credit score, who ended up receiving a 12.9% rate for a £20,000 loan which was advertised to her at 6.7%.
If we are speaking logically, a loan provider of any description should be rewarding those applicants with the best credit scores with the best rates. It seems fair that the stronger the applicants credit score and their affordability profile, the more likely they should be able to make the repayments on time and in full.
Therefore, they are less of a risk to the lender which should mean they should be receiving a lower interest rate as charged. Furthermore, it can act as a good incentive for those with bad credit scores. If the interest rates are lower for those with good credit scores, it gives people reason to work on improving theirs.
This is also how credit cards work. You will pay lower rates based on your current credit score.
Understanding the Representative APR
It is fair to say that many credit applicants understand the way APR works. You may be shocked to find out that the APR which you will see advertised on a website or brochure will only be available to 51% of successful applicants. This is a rule provided by The Consumer Credit EU Directive since it means that over half of the people who apply will receive the advertised rate. Thus, this can explain why people with good credit scores and the like can receive a different rate should they fall into the 49%.
You may also recognise the term ‘typical APR’. This is the rate which must be sold to at least 66% of successful applicants. The factors which are going to affect your rate include your credit score, the length of your loan and of course, it will be heavily dependent on the lender you apply with. There are going to be cases where an APR may seem rather higher (e.g with a payday loan) and this is because they are only meant to last a few weeks at a time and to be expressed as an APR they are compounded multiple times, which makes them seem a lot higher than the reality of the situation.
Your credit rating
Although there are anomalies like the examples mentioned above, fundamentally your credit score assesses the rate that you pay. This is perfectly highlighted by the cost of personal loans and credit cards whereby customers with better and stronger credit histories will receive lower interest rates and closer to the ones advertised. See also how to get the best deal on a loan.
Lenders will explain that you may not receive the rate which was advertised to you due to affordability checks. An affordability check is where they will look at the ratio between your income and the debt to see how much you can actually afford to pay back. In order to calculate this, the lender may request to see your monthly outgoings such as your rent/mortgage, typical food bill, credit card statements and ask for proof of these with a bank statement.
If it is clear to a lender that you have other liabilities such a credit card bill, mortgage payments or several people financially dependent on you, then it is understandable that you may not be given the lowest rate possible since you have other financial commitments which presents a slight risk.
The length of the loan
The exact dates and time that you apply for the loan will also somehow impact the rate advertised. However, it makes sense that if the rate advertised was based on 30 days but like most people you apply during a bank holiday weekend or over Christmas, you might be applying for a loan that is longer than 30 days and this will be reflected in a different APR and interest rate.
Loyal customers will be rewarded
Loyal customers to a particular lender are more likely to qualify for the lowest rate on a loan possible. If you have developed a good track record with the lender and already have a history of repaying loans on time, they are likely to reward you with a more competitive rate. Again, this is another incentive to work with the same lender.
Especially in the case of banks, if you are an account holder, they are willing to offer more favourable rates compared to if you just applied outright.
You can ask your lender why
You may legally contact the lender you applied with and ask them exactly what factors resulted in the APR rate that you received, or even if your application was rejected. Be aware that they will not tell you this straight away, but give you the information via the EU Directive who will formally write to you.