Analysis by MoneyComms has suggested that millions of people could be paying thousands of pounds worth of interest charges on personal loans due to a ‘lack of transparency’ from lenders.
Under current regulations, banks only need to provide 51% of customers with an advertised offer and the representative or advertised rate is the lowest rate that the minimum percentage of customers will pay. However, most of the time customers are not given the advertised rate as they do not have a good enough credit score.
The research conducted for TotallyMoney shows that for a typical £3,000 personal loan with a subprime 69.9% APR, a lower credit score of around 400-500 could end up adding £2,499 worth of interest over 36 months. This means repayments would total £5,958. A £5,000 loan could attract an extra £3,942 in interest, while a £10,000 loan might see a borrower paying back an additional £13,541.
With the personal loans market growing by 13% in 2023 — to £42.1bn, TotallyMoney investigates pricing and eligibility, and warns that a lack of lender transparency could be costing customers thousands of pounds in interest charges. The research found:
For a typical £3,000 loan, having a poor credit score mean a customer pays an extra £2,499 interest over 36 months, compared to somebody with an ‘excellent’ credit score. This rises to an extra £3,942 for a £5,000 loan, and a massive £13,541 for a £10,000 loan. 14% (7.2m) of adults now have a personal loan.
However, in the past two years, 31% of loan applications were refused‡ and 6.8 million adults (13%) avoided applying for a financial product or service because they thought they wouldn’t be eligible.
How much a typical £3,000 best buy loan would cost to repay over a 36 month term when compared to a similar product for those with poor credit scores/thin credit files.
£3k personal loan, with a 36 month term | ||||
Product
APR Scoreband |
Best buy
9.9% APR 575-710 |
Near-prime
31.9% 501-575 |
Subprime
49.9% 426-500 |
Subprime
69.9% APR 426-500 |
Total repaid each month | £96.07 | £134.10 | £146.39 | £165.61 |
Extra amount paid | N/A | £38.03 | £50.32 | £69.54 |
Total repaid | £3,458 | £4,828 | £5,270 | £5,958 |
Total extra amount paid | N/A | £1,369 | £1,812 | £2,499 |