Picking a loan should be easy. Decide how much you need – say £5,000 – and how long you want to have this debt hanging round your neck – say three years. Then look for those loans in the best buy tables and pick the one with the lowest annual percentage rate (APR). Trouble is, it’s so easy the banks have found a way to stop it working.
If you look in the Bible of comparison tables, MoneyFacts, many major banks are not listed in the loans section. Or rather they are, but the listing just says PP, which stands for personal pricing. In other words the bank will not say what rates it lends at. It all depends on the credit rating of the borrower. If you have a perfect rating, you might get a good rate. If you have a poor credit rating, you may not get a loan at all. And if you’re in the middle, you may get one but at a higher rate.
You cannot even shop around easily among the banks that do publish rates. Look carefully and you will see the APRs are nearly all called “typical”. In other words the rate is not guaranteed – you may be charged more, again based on your credit rating. To call a rate typical the lender has to offer it to at least two out of three successful applicants. But there is a one in three chance you will be charged more. To find out what your rate will be you have to apply. And every time you apply for credit – whether you take it or not – a trace is left on your credit record. Make too many applications and your rating will come down – pushing up the price you are offered.
There are almost no lenders who offer the same rate to everyone. So find the cheapest typical APR for the loan you want, then apply only for two of those and go for the cheapest you are offered.
But there is one way you can save a lot of money. When you are offered payment protection insurance with the loan – and you always are – just say “no”. If you really want it, do a Google search and buy it from an independent insurance company (make sure it’s regulated by the FSA). It can be as little as a tenth of the price charged by the banks.
Paul Lewis is a freelance writer who presents Money Box on BBC Radio 4