Not everyone gets the same loan at the same rate: headline rates explained

If you are thinking of applying for a loan, you should be aware that there are many different loan products available and that not all people will be offered a loan at the rate it is advertised. There are two major types of loan: secured and unsecured. The former is only granted on the basis that something valuable is offered by the borrower as security for the loan, usually property. An unsecured loan, on the other hand, is given without the need for the borrower to agree to any security.

In the current climate of fierce competition and aggressive lending by the financial sector, secured and unsecured loans tend to be very competitive in terms of interest rates - both from high street and specialist lenders. When advertising a loan, a financial institution will have a published headline rate (APR). According to an OFT ruling, this rate must be offered to at least 66% of successful loan applicants. What this means in a competitive market is that potential borrowers who have the best credit profiles will go for the most attractive headline rates, and will usually get them. However, applicants who do not score as highly as the top 66% may be offered the same loan product at a higher interest rate rather than be declined outright by the lender. The justification for the lender to charge a higher interest rate is the level of risk involved.

Each prospective borrower is individually assessed in order to determine a level of risk; the lender can therefore determine whether to lend to an applicant and also what rate of interest to charge. As well as a risk assessment, the lender will also factor other things into the equation, such as any security and the purpose of the loan.

For example, if you already have a large amount of debt and are seeking a debt consolidation loan, prospective lenders will assess your personal credit score, how much you can afford to pay each month, your past credit history and whether you own your home. If you suffer from a bad credit history, loans can be difficult to get from high street banking institutions, even if you are homeowner. But there are many specialist lenders who will offer bad credit loans for debt consolidation and many other purposes based on a different set of criteria to the ones applied by high street lenders. However, these loans can have different interest rates to those available on the high street.

Many critics claim that the people who can afford it least end up paying the most when it comes to borrowing. Financial companies counter that argument by saying that they are less likely to encounter difficult repayments from those who are a good credit risk, and therefore the differential is justified.

But, if you are thinking of applying for a loan, get a loan quote first. There can be a huge price differential between financial institutions so you shouldn’t just accept the first offer!

Adam Singleton is an online, freelance journalist and keen amateur photographer from Scotland. His interests include travelling and hiking.