Someone taking out a personal loan pays on average twice the advertised APR according to the analysis of loan interest rates by The Centre for Economic and Business Research (CEBR) on behalf of Saga Money.  The average loan APR available on the High Street is 3.5%, but Bank of England data shows that effective interest rates are typically 6.9%.*

This suggests a massive disparity between the headline rates advertised prominently on the banks’ websites, and the actual interest rates faced by customers. This is likely to be because of two factors: credit scores and loan size.

  • Credit Scores – The impact of less than perfect credit scores, which are often not the fault of the applicant.  Because some providers do not take into account anything other than earned income when calculating someone’s credit score, people who derive income from a variety of other sources such as pensions and investments can be adversely affected and this includes many older people.  Often they are pushed into a riskier lending category, leaving them facing higher-than-representative interest rates.
  • Loan Size – Many loans fall outside of the value range for which the most prominently advertised interest rate applies.  Advertised APRs are usually based on a loan size of around £7,500 – £10,000 as loans of this size are appealing to lenders as they typically take longer to pay off and therefore banks can earn more in interest.  However, those that want to borrow a smaller amount will typically pay much more than the main advertised APR.  Loans for £5,000 by major banks currently advertise an APR of anything up to 13.9%.

Under FCA guidelines the advertised APR offered on personal loans must be taken up by 51% of those who are accepted for a loan, the remaining 49% will be offered risk-based pricing which accounts for the higher effective interest rates.  In essence, the 49% who pay sometimes significantly more are subsiding the low rates offered to those who lenders deem to be a good risk.

Gloria Barker, head of personal loans at Saga commented: “Consumer awareness of the way the personal loan market works is low.  Over half of people are unaware that even when accepted for a loan they may be offered a higher rate than advertised and by the time they discover this they are likely to have already left a footprint on their credit record.  More needs to be done to make people aware that the rate advertised is not the rate they will necessarily get.”