Page last updated at 23:00 GMT, Tuesday, 15 September 2009 00:00 UK

How much will your loan cost you?

Money Talk
David Black
Defaqto

Notes and plastic cards
Lenders are much fussier than they used to be

Looking for an unsecured loan or credit card?

Unless you are in good shape financially, it is no longer as straightforward as it used to be.

The increasing levels of unemployment, personal indebtedness and arrears - together with the general malaise in the financial markets - has meant that banks and building societies are much more wary about whom they will lend to.

From their perspective it is a case of quality not quantity, so there is a growing tendency for them to focus unsecured lending on existing customers and, in particular, those with one of their own current accounts.

Stricter

If you leaf through the accounts of various lenders you will regularly see statements saying that they are adopting a cautious, conservative or prudent approach to unsecured lending.

David Black
We are no longer in a world where one rate fits all for unsecured loans and credit cards

Much stricter underwriting criteria are being used and the proportion of loan and credit card applications being rejected has shot up.

Even for those who are deemed to be creditworthy enough to be offered a loan, there is no longer a level playing field.

If you have a great credit record and secure employment you can access the best deals, but once credit blemishes start multiplying, so will the difficulty in getting offers from mainstream lenders.

This is what is known variously as risk pricing, pricing for risk or personal pricing.

What it means is that we are no longer in a world where one rate fits all for unsecured loans and credit cards.

Credit records

From a website point of view, probably the most open exponent of risk pricing is the Halifax.

Have a look at the summary boxes for their credit cards and you will see three different rates cited in each category.

For example, one of their cards cites a monthly rate charged on purchases of 1.24% or 1.527% or 1.667%.

In their words: "as we treat all our customers and their applications on an individual basis, the APR (Annual Percentage Rate) and interest rates we offer are determined by the details customers supply, along with an independent verification of credit and repayment history".

Those with the best credit records get the lowest rates, whereas higher rates are charged to acceptable applicants who are deemed less creditworthy.

Put simply, the applicant's personal circumstances will determine the rate to be charged.

Limits

Quite apart from risk pricing, some applications fall into a grey area in which the lender is not quite sure whether to offer a loan or credit card.

In such circumstances it is fairly common for additional questions to be asked and this may take the form of a conversation with an underwriter.

If the loan application succeeds, risk pricing is likely to be used and the rate offered may be considerably higher than that available to the most creditworthy customers.

It can be very annoying, especially as... no advance warning will be given

It is not just new applicants who are assessed as it is becoming increasingly common for existing borrowers to be assessed on a regular basis as well.

Affordability, credit reference, indebtedness, financial behaviour and usage are all part of the monitored mix.

Many credit card holders will get letters advising that "due to economic circumstances" your interest rate is being increased, or the credit limit has been reduced, or the proportion of the credit limit that can be taken in the form of cash advances is being limited, or that the account is being closed.

Repairs

The lenders call this sort of activity responsible lending and, given the rising level of arrears that they are experiencing, it is not surprising.

For the account holder, however, it can be very annoying, especially as, in the case of a reduction in credit limit, no advance warning will be given.

For those that get rejected by the mainstream providers, there are a handful of credit card companies that concentrate on what they call the underserved market and those who need to repair their credit records.

Aqua, Monument and Vanquis are the main participants in this market and the interest rates they charge are considerably higher than those available in the prime market.

They are also subject to risk pricing.

Vanquis, for example, cites "rates from 39.9% APR variable to 59.9% APR variable depending on individual circumstances".

Contrast this with the average APR, which is roughly 17% for the mainstream prime credit cards.

Barclaycard and Capital One also offer a credit repair credit card.

Typically, the initial credit limit offered by sub-prime credit cards will be fairly low.

But subject to an ongoing and satisfactory repayment record, the limit may eventually get increased, the interest rate charged lowered, or the cardholder may become eligible for more competitively priced cards.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.



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