You will commonly see loan companies and finance providers advertising different rates of interest on their store signs, bank windows and websites. Many people who apply for money are sometimes left confused as to why they might not have received the rate which was advertised by the lender. This can even happen to those who have a strong credit score, stable and good employment and homeowner status – you would expect in these circumstances to be given the lowest rates.
So why is the rate I receive different to what they advertise? We explain below.
Understanding The Representative APR.
By regulation, every short term loans lender must clearly provide the representative APR with every financial promotion. The APR is a simple percentage and used to compare financial products across the board.
Crucially, it is not widely known that the representative APR advertised is only available to 51% of successful applicants. This is a rule set out by The Consumer Credit EU Directive. Such a ruling is a fair and logical approach since it means that lenders have to give the advertised rat to over half of their borrowers. It also results in lenders not having to give a borrower anywhere near what they advertised as the representative APR if you fall into the other 49% of applicants.
You may have also noticed it being referred to as ‘typical APR’. This is the rate which must be provided to 66% of successful applicants rather than just 51%. As a result, you are not always entitled to the rate advertised, but at least 1 out of 2 applicants will be, or a lower interest rate.
Logically, the lenders should be giving the lowest rates to those who have the best credit scores, since they are seen as more likely to repay their loan on time and therefore less as a risk to lend to. Having the best rates for those who have good credit scores can also act as an incentive for those with bad credit scores to work on improving them.
Lenders who offer finance to those with bad credit obviously take more of a risk with those people they grant loans or credit cards to, so they will typically offer much higher rates to their customers – hence they do not receive the rate advertised.
Lenders may say that the reason that you did not receive the rate which was advertised is due to background affordability checks. This involves a potential lender looking at the ratio between your income and the debt to see how much you will be able to afford. In order to carry this out, your provider may ask for records which display your monthly expenses on things like rent, mortgages, food, credit cards – these will be displayed on your bank statement.
If your lender decides that you have too many outgoings and are deemed a higher risk of default, this is translated into a higher APR.
Ask Your Lender Why.
Just so you know, you are entitled to ask the lender why it was that you were not given the rate which you saw advertised by that company. They cannot tell you outright but they are to write to your formally upon request as part of the EU Directive. This way you can at least get some closure and know that there was just reason.