Loans - Couple of questions..

sandybrag

I recently applied for a loan, but instead of offereing me the APR rate they were advertising, they offered me a rate 1.5% higher instead.

I have no debts, no credit cards, just a mortgage and a good full time wage with an employer Ive been with for several years, with good sick pay cover, so I can't understand this decision. Ive never even owned a credit card.

I could easily afford the monthly charge. But what I cant understand is, assuming they thought I could not afford the repayments for whatever reason, why offer me a higher rate, and make me pay back even more each month?.

This is the first time I've ever applied for a loan, and I'm really stumped and confused by this.

I turned this offer down, but is this now going affect future applications when I go elsewhere?. Any help or advice would be much appreciated.

Debt_Free_Chick

This is one of the most difficult questions to answer.

Your credit record and ability to repay is only part of the picture. In addition, each lender has its own "scorecard". The type of things that go on some scorecards include marital status, postcode, profession/occupation ..... and none of the lenders publish details of what their scorecards contain, so you never fully know what counted in and against you. The reason for not getting the headline APR will probably always remain a mystery.

If you turn this offer down, it won't affect your credit rating. Your credit record will simply show that the lender has made an enquiry. If you have several enquiries over a short space of time, that might alarm certain lenders - but another enquiry now is generally taken to mean "shopping around" so you might want to make another application with a different lender.

You say you have a good credit record. However, you have no credit (and a mortgage doesn't really count here). Having a credit card with a history of paying on time can improve your credit record.

Do you absolutely need a loan now? Is the APR offered still good value?

If you don't need a loan now, perhaps getting a credit card and using it for 12 months will help. Be careful though! Remember to use it only instead of cash and pay it back each month. Don't use it to borrow money as it's horrendously expensive :eek:

enjoyincubus

A lot of loans companies use variable pricing. This is where they do not offer you the typical, or lowest rate advertised.

This pricing is purely a "rate for risk", what this means is they are charging you based on the level of risk they believe you represent to them.

To decide your level of risk the loan company would have used a credit scorecard. This takes characteristics such as your age, employment status, existing debt, time at address, debt repayment history etc. At the end of this process you end up with a 'credit score' and this can be linked to how many customers default and do not repay, and therefore how profitable you would be.

For example, your score may have been 250. Customers who score 250 points may have a default rate of 10 in 100. To get the typical rate you may have needed to score 275, as at this score only 5 in 100 customers default on their loan. Because only 5 customers default per every 100 they can be charged the lowest APR. However, because people with your score default at a higher rate they have to charge you a little bit more to cover the losses of the other 5 loans who defaulted.

The amount of the loan will also determine the price, as lower value loans are harder to make profit on. This is because the loan company would get less interest back.

10% APR on top of a £3,000 loan over one year = £300
10% APR on top of a £25,000 loan over one year = £2,500

(ignore the fact as you make repayments the loan interest would decrease month by month - above example just to make a point!)

If you assume all other costs are equal (staff are still paid the same wage, the building costs are still the same, marketing still is the same no matter what loan value you apply for) then you can see that there is a lot less money to be made on the lower value loans. This is why you may have been charged a slightly higher APR too.

Reading what you have written in your post, my guess is that you represent a "good" risk. However you do not have any existing debts, apart from your mortgage. To me that shows you have no repayment history. Credit scorecards can only use the information you gave it, or that is on your credit file. If you have no (or limited) information there, then it is harder to make an accurate decision. Everything else about your profile is low risk (stable employment, no adverse credit etc). Just without the proof of you repaying other unsecured debts, such as a credit card, then it is hard to be sure you would be a good repayer.

If you keep applying for loans then this will affect future applications as they will see the search registered for this loan. However I would encourage you to shop around as you shouldn't go for the first loan offered! However, just bear in mind that each application you make will affect any others slightly, so don't go silly!

Hopefully that is of some use, although probably a bit too much information! I am a risk analyst within loans for a major UK bank, so hopefully I *should* know what I am talking about... (some may disagree!)

I believe there are articles written by Martin on this site about credit scoring and pricing. Check under here: http://www.moneysavingexpert.com/banking

If you don't mind me asking, who was the loan with, and what was the typical APR they advertised?

sandybrag

enjoyincubus wrote:

A lot of loans companies use variable pricing. This is where they do not offer you the typical, or lowest rate advertised.

This pricing is purely a "rate for risk", what this means is they are charging you based on the level of risk they believe you represent to them.

To decide your level of risk the loan company would have used a credit scorecard. This takes characteristics such as your age, employment status, existing debt, time at address, debt repayment history etc. At the end of this process you end up with a 'credit score' and this can be linked to how many customers default and do not repay, and therefore how profitable you would be.

For example, your score may have been 250. Customers who score 250 points may have a default rate of 10 in 100. To get the typical rate you may have needed to score 275, as at this score only 5 in 100 customers default on their loan. Because only 5 customers default per every 100 they can be charged the lowest APR. However, because people with your score default at a higher rate they have to charge you a little bit more to cover the losses of the other 5 loans who defaulted.

The amount of the loan will also determine the price, as lower value loans are harder to make profit on. This is because the loan company would get less interest back.

10% APR on top of a £3,000 loan over one year = £300
10% APR on top of a £25,000 loan over one year = £2,500

(ignore the fact as you make repayments the loan interest would decrease month by month - above example just to make a point!)

If you assume all other costs are equal (staff are still paid the same wage, the building costs are still the same, marketing still is the same no matter what loan value you apply for) then you can see that there is a lot less money to be made on the lower value loans. This is why you may have been charged a slightly higher APR too.

Reading what you have written in your post, my guess is that you represent a "good" risk. However you do not have any existing debts, apart from your mortgage. To me that shows you have no repayment history. Credit scorecards can only use the information you gave it, or that is on your credit file. If you have no (or limited) information there, then it is harder to make an accurate decision. Everything else about your profile is low risk (stable employment, no adverse credit etc). Just without the proof of you repaying other unsecured debts, such as a credit card, then it is hard to be sure you would be a good repayer.

If you keep applying for loans then this will affect future applications as they will see the search registered for this loan. However I would encourage you to shop around as you shouldn't go for the first loan offered! However, just bear in mind that each application you make will affect any others slightly, so don't go silly!

Hopefully that is of some use, although probably a bit too much information! I am a risk analyst within loans for a major UK bank, so hopefully I *should* know what I am talking about... (some may disagree!)

I believe there are articles written by Martin on this site about credit scoring and pricing. Check under here: http://www.moneysavingexpert.com/banking

If you don't mind me asking, who was the loan with, and what was the typical APR they advertised?

Many many thanks for both your input, and for taking the time to reply. I really wasnt expecting such a detailed and thorough replies, Im really impressed . Sorry I cant hit the Thanks button yet, Im at work and the desktop browsers do not support the Thanks button here!.

In answer to your question enjoyincubus, the loan was with Northern Rock, mainly because I liked their option of no penalties on repaying the loan early, which is what my intention was to do, and the typical APR I was after was 5.9%.

I really cant believe that people like myself who have never needed credit could possilby refused it simply because of this very reason. It's a catch 22 situation surely?.

Are there any other lenders you might suggest?. I don't want to go through my own bank really because their rates are higher, but at least this may be a way of getting around this situation because they could see my finances at first hand?.

I've never needed to borrow before, and this experience is really deterring me from bothering again.

Thanks again for your input,
Sandy