TotallyMoney has calculated the cost of a poor credit score for customers looking to lock in a personal loan.
The research found that for the most commonly provided loan of £3,000, somebody with a poor credit score could pay an extra £2,668 in interest charges over 36 months, when compared to somebody with an ‘excellent’ credit score.
This rises to an extra £4,663 for a £5,000 loan, and £9,542 for a £10,000 loan. More than 20.2 million adults are ‘financially under-served’ — meaning 1 in every 3 might only have access to near prime or subprime credit offers.
In the past two years, 31% of applicants have been refused a personal loan§, and 2.6 million low-income households (22%) now hold a loan with high cost and/or illegal money lenders
Personal loans are unsecured loans that customers agree to make repayments for over a set period of time, ranging from months to years. They’re usually taken out by customers wanting to cover bigger, one-off payments such as home improvements, and can also be used for consolidating debts.
Last year, the UK personal loan market grew by 8%, to an estimated £37.7bn, and is expected to reach £43.9bn by 2027#. However, not all loans are equal, and with most banks using credit report data to choose who to lend to, some will end up paying more than others.
Over the past two years, the UK’s finances have been pushed to the brink, with almost a third (29%) of adults stating they would find it difficult to cover an unexpected bill of £100. Meanwhile, 5.6 million have missed a payment for a bill or credit commitments, and 10.9 million are finding them to be a heavy burden.
Missing payments and high credit usage both negatively impact one’s credit score. In 2022, TotallyMoney’s report with PwC found that 20.2 million adults could be struggling to access mainstream credit as a result of poor credit scores and thin files. Separate research has found that in the past two years, almost one in three people have been refused a personal loan, something which can also impact one’s ability to access credit offers.
Recent reports have found growing use of Buy Now Pay Later to cover essentials◊, while 2.6 million low-income households (22%) hold a loan with a payday lender (which can carry APRs of 1,500%), pawnshop, doorstep lender, or loan shark.
Alastair Douglas, CEO of TotallyMoney said “Keeping up with the cost of living is proving very difficult for millions, and many are turning to credit to make ends meet. However, not everyone has a perfect credit score, so for those classified as near prime and subprime, this means paying more to borrow the same amount of money.”
“Missed payments, using more than 25% of your credit limit, or simply not being registered to vote can all impact somebody’s credit score. And with most banks still using credit report data to assess a customer’s ability to repay money, millions are finding most mainstream providers are out of reach.
“And with more people defaulting on repayments, banks are exercising greater caution when it comes to deciding who to lend to, resulting in 2.8 million low-income households having their loan applications declined. The result is that some borrowers will be turning to payday loans, and almost 3 million people have been pushed into the arms of high cost or illegal money lenders because of the credit vacuum.”
“Government support is poor at best, and the financial services industry needs to move with the times, and fast. Credit report data is stuck in the past century, and more lenders need to be ready to connect to a customer’s open banking data. This will provide banks with better insights to make more accurate affordability decisions, resulting in improved outcomes for customers.”
Andrew Hagger, Personal Finance Expert, Moneycomms.co.uk said “It’s only when you look at the extra cost in terms of pounds and pence, for having a damaged credit record that you realise the importance of protecting your credit file and score.”
“Unfortunately, it can lead to a spiralling debt situation that’s difficult to escape from unless you’re very disciplined and able to manage the higher monthly costs while your credit score gradually recovers.”
“If you’ve had credit issues in the past, a lender will consider you higher risk and price their products accordingly – it may seem unfair but it’s the harsh reality when it comes to borrowing money.”