EZ Wealth and Money

Banks make you pay more for a smaller loan

By Liz Phillips
24 November 2010

Banks are making it harder for borrowers to get a loan at a reasonable rate as Christmas approaches.

Christmas cutback: Banks are offering the best rates to existing customers.

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Most major banks will lend only to their own customers, who have to apply ‘blind’ without having any idea what interest rates they will be offered.

And, in a cynical move to sting careful borrowers, those wanting less than £7,000 can end up paying £2,000 more in interest than those borrowing larger sums, because interest rates on lower amounts are higher.

Many of the banks have moved away from advertising typical rates which were available only to those with a good credit history and now offer loans without quoting an interest rate.

Instead, they are using personal pricing which means each applicant’s credit record is examined before they are told what interest rate they will have to pay.

And this has a nasty knock-on effect. if a person does not like the interest rate they are offered, they have to reapply elsewhere.

But credit scores deteriorate as a person makes more loan applications — even if they do not take them up — resulting in them either being turned down for credit, or being offered a loan at a much higher interest rate.

Michelle Slade, of financial researcher Moneyfacts, says: ‘Either they aren’t advertising any rate or are showing a rate as an indication of what you may get. This makes it impossible to shop around for a good deal. You’ll have to go through the full credit scoring system before you get a quote, but once you have checked two or three rates you’ll damage your credit history because they’ll think you’re desperate and have been turned down by other lenders.

‘They need to change the system so that you can compare rates without adversely affecting your credit score.’ Banks tighten their lending criteria because they fear riskier clients are the ones who borrow in the run-up to Christmas.

Tim Moss, head of lending at Moneysupermarket.com, says: ‘Most banks cherry-pick their best customers and then charge them more for a loan. it makes a mockery of the system. They should be treating loyal customers like gold.’

They are also penalising those who don’t want to take on too much debt. If you want to borrow less than £7,000, you’ll be charged much more for the privilege. The most National numbers and 19. Have given totalling £1,555 Halifax, for instance, typically charges 9.9 pc for those borrowing between £7,000 and £15,000, but borrow less than this and the rate shoots up to 19.9%.

According to calculations by Moneysupermarket, someone who took a £4,950 loan over five years would pay £4,041 in interest but a borrower who took £7,000 would pay £1,965 interest.

Halifax says there is no fixed rate for loans under £7,000 as they’re based on the risk-assessment of the customer. The same occurs at HsBC where interest rates can be as low as 7.6% to borrow £7,000 and 16.9% on £6,950.

So you could pay up to £1,793 more in interest over five years on a similar-sized, cheaper loan. Both banks will lend only to existing customers and increase the rate according to how risky they consider them to be.

‘Thousands of borrowers are unaware of this huge disparity in rates. It’s so unfair to catch them out this way,’ says Mr Moss. Ironically, only the Post Office, which is backed by the crisis-hit Bank of Ireland, has a fixed-rate of 8.9% for loans between £5,000 and £25,000. So if your application is successful, that’s the rate you will pay.

Sainsbury’s Finance and Tesco Loans charge 8.7% to those borrowing £5,000 over five years. Loans of £7,500 cost 7.7% at Sainsbury’s and 7.9% from Tesco. Sainsbury’s reserves these rates for people who have its free Nectar loyalty card.

Others who will lend to those who aren’t existing customers include the AA, Alliance Leicester, the Co-operative Bank and its internet arm, Smile, and Santander.

Barclays will consider those who don’t bank with them, but its rate for a £5,000 loan is an astronomical 26.9% compared with 16.4% for existing customers, says Moneyfacts.

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READER COMMENTS

Comments so far (2)

1.
Banks soak the poor and grovel to the rich .Look at the article below this where AL (Santander)charge 15.7% for a loan of £2900 and 7.9% or less for one of £3100.
Also the rich can get mortgages from foreign banks at little over 1.7% and the rest of us get 2.5% with a £1,000 arrangement fee.This is not a proper regard to risk,it is the rich looking after their own.

- Boris Mcdonut, Cheddar
Posted: 29 November 2010, 6:38pm

2.
I feel P2P lending websites can play a healthy role in offering personal loans at a more decent rates than what the banks seem to be offering. What makes it even better is the fact that most p2p sites would offer lower rates on loans requesting smaller amounts rather than the other way around… check out p2p websites like yes-secure, zopa for more details…

- Julia Audi, London
Posted: 4 January 2011, 8:24am

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Article source: http://www.newsisfree.com/click/i,531725933,30884,30884,rss/