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Clare Francis: While mortgage rates are at last coming down, unsecured and secured loan rates are continuing to rise, so I'm with Paul Wilson who's a loan and debt expert at moneysupermarket.com to ask what's going on in the loans market at the moment, and also to ask for his tips and advice for anyone needing to borrow.
Q1: So Paul, can you also explain why loan rates are going up given that mortgage rates have started to fall back?
Paul Wilson: Sure yes, I mean it probably feels like it's getting blamed for everything at the moment, but the credit crunch is certainly one of those reasons why loan APR's are going up. The credit crunch has affected liquidity in the market, which means that the providers physically don't have the pound notes to lend out to customers in the forms of loans. Now the flipside to that coin is that [there are] some very attractive savings rates at the moment, because all the providers are looking to bring income into the bank, into the lending organisation, to lend out again in the form of personal loans.
The other thing that has recently happened is a change in something called the ICOB (Insurance Code Of Business) rulings. This happened back in July, which has affected the way that lenders can structure and charge for payment protection - which is commonly known as PPI - and that's basically affected the profitability behind PPI and so that shortfall in profit has been passed on to another part of the loan, which is the APR. So the lenders are looking to recoup that shortfall in profit by passing on that charge within the APR so the actual physical cost of the loan is rising.
Then finally we've seen quite a number of lenders withdraw from the market as well. So we've got less funds available, less providers, which means that the demand is all the greater for that shorter supply.
Q2: Lenders are also more cautious about who they'll lend to because of rising levels of bad debt and even if you are accepted for a loan you might find that it's a much higher rate than the one you applied for - can you just explain why that's the case?
PW: Yes that's right, that scenario is known as 'rate for risk', and rate for risk will be offered to someone who is on the cusp of being accepted. So you might apply for a loan, say for example, 8.9%, but when they've credit scored you and gone through the actual credit checks behind getting the loan, you perhaps just failed to meet their accept rate, their cut-off point if you like. So instead of giving you a flat blank refusal and decline you for that loan, they might come back to you with an increased APR offer - and that increase in APR is to offset the perceived increase in risk that you might pose to the bank.
Q3: And the advertised rate is called the 'typical rate' - what proportion of applications have to be offered that rate?
PW: Okay, yes the typical APR is the rate you should be looking for on all advertised material from the lenders, and the typical APR really is your best point of reference for a guide in terms of price of a loan. So, on the back of an advertisement or promotion, let's say they're again advertising 9% APR rate, the bank or lender has to offer that rate to 66% or two thirds of the accepted applicants to that loan application. And the reason lenders have to show the typical APR is really to stop them from offering silly rates, lets say 3% APR on a loan within their advertised material, when the customer then applies they all get offered 15%. If the lender offers a typical APR of 3%, then 66% of the accepted business has to be written on that 3%.
Q4: Are there any steps you can take to improve your chances of being offered the typical rate, or if you know you've got a really bad credit history just increase your chances of being offered a loan at all?
PW: Yes there's a number of things we can all be doing, and probably should all be doing as well as a matter of course. The first thing is to make sure you're up-to-date with all your payments when a lender is making a decision whether to lend you the funds or not. They will look at your payment history - so make sure your bills are up-to-date. If you've missed credit card bills, and you've got defaults on your credit history then that will impact on their decision process as to whether they lend you the money.
The second thing is again part of that decision process of when they're making a decision as to whether to lend you the funds, a bank or a lender will credit check you. So get hold of your credit report, make sure the information is accurate and up-to-date.
The third thing to think about is that all lenders like consistency and stability, so make sure you're on the electoral roll. Also if you've just changed to a new current account or perhaps you started a new job or you've just moved house, you might want to hold off on your loan application.
And then finally, just be clever with your searches as well - don't go for a sort of scattergun approach of: "I'm going to apply for 13 loans, and hope that I get accepted on 1 of them". Find the product that you want, find the one that's right for you, and
Smart Search - a tool on the loans channel - can help you with that process, basically help using credit-related information that you put into the tool. Smart Search will make recommendations onto the products that you're more likely to be accepted for.
Q5: We've mentioned rate for risk and typical APRs - is there anything else that you need to bear in mind when comparing loan deals and trying to work out which is the best one for you?
PW: Yes absolutely - the obvious one is too make sure you read all of the documentation carefully and make sure you understand all the aspects of the loan. If there's anything you don't understand then pick up the phone and speak to the customer services team and ask them to explain it to you.
In terms of actual specifics, make sure you check whether the rate is fixed or variable - if a rate is fixed then that APR will never increase for the term of the loan and so your monthly repayment will always remain the same. Be careful if it's variable because that means that the rate could increase. It's usually on secured loans that are for long repayment terms, perhaps seven or eight years, that rates are variable, but make sure you double check that.
Likewise other things to look out for are if you've opted to take out PPI, make sure that the policy covers you for what you need it to cover you for, and also make sure that it's competitive in terms of the price you're paying for it is value for money for the things that it's covering.
And also, if your offered things like courier services or repayment holiday, think about whether you do truly need them because all these things will come into cost.
Q6: What about if your circumstances change during the term of your loan and you find that you're actually able to repay it earlier - are you allowed to do that or will you be charged a penalty for doing so?
PW: You will be able to replay your loan early, but there will be penalties involved or there will likely to be a penalty involved and they will vary from lenders, so make sure you double check that as well.
CF: Thanks very much Paul.
PW: Okay, thank you.