Calculated: Cost of loans for those with a poor credit score
TotallyMoney, the credit app which helps everyone move their finances forward, has commissioned Moneycomms to investigate the eye-watering gap in personal loan interest rates for those with poor credit scores. Research found*:
Best buy loan rates on a £5,000 loan are around the 4% mark but those with a poor credit score could be subject to an APR of 60%
This means someone with a poor credit record borrowing £5,000 over 3 years might find themselves paying an extra £116.36 per month compared with a low-rate best buy deal
A borrower with a poor credit score could pay an extra £2,319 in interest charges on a £3,000 personal loan over 3 years
TotallyMoney and PwC calculate that just over one in three adults (20m) may struggle to access credit from mainstream lenders**, with soaring inflation, stagnant wages and rising interest rates threatening to push a further nine million into this category
Full data tables, calculating monthly and yearly interest charges for prime, near-prime and subprime loans for balances ranging from £3,000 to £10,500 can be found below.
Personal loan rates rising but non-prime rates on a different level
Personal loan rates for typical prime borrowers have edged up in recent months as the Bank of England continues to hike interest rates to try reigning in Britain’s soaring inflation.
According to Bank of England statistics† the average interest rate on a £5,000 loan has risen from 7.82% APR in January to 8.41% at the end of August. Similarly, the rate on a £10,000 loan has increased from 3.94% APR to 4.38% over the same period.
However, best buy loan rates are still close to historic lows — with rates of 8.1% APR for £3,000, 3.9% APR for £5,000 and 2.9% APR for £10,000 on offer to those with an excellent credit record.
However, for those excluded from the mainstream market, the tables below highlight the chasm in costs for those forced to borrow at non-prime rates at anywhere between 31.3% APR and 59.7% APR.
Alastair Douglas, CEO of TotallyMoney comments:
“The difference between a good credit score and a poor credit score can be thousands of pounds. However, checking your credit report is free to do, so customers must take a look to see if there’s anything holding them back.
“Not only could they be paying less for loans, but they could also be missing out on the best credit cards, mortgages, and even car insurance and mobile phone deals. So it really can impact all areas of life.
“And any money saved can be put towards repaying existing debts, covering the increased cost of living, or put aside for a later date.
“Higher repayments can push people closer towards missing payments. Anybody struggling to keep up should contact their lender and seek assistance at the earliest opportunity. Lenders have been urged by the regulators to act in the customer’s best interest and while it may seem daunting at first, customers could avoid defaulting on a repayment which can leave a mark on the credit report for years to come.
“At TotallyMoney, we’re on a mission to help everyone move their finances forward. Our free app puts customers in control of their own data so they can track, manage, protect and improve their finances.”
Andrew Hagger, Personal Finance Expert and Founder of Moneycomms added:
“Borrowers with an imperfect credit record are being hit hard because they are identified as a greater risk and more likely to default based on their previous track record.
“Many people don’t appreciate what a poor credit record means for them in terms of borrowing costs – it’s not just a few extra pounds per month – it can run into thousands of pounds extra interest charges even on a modest loan of £3,000.
“With spiralling interest rates and inflation and the punishing ongoing cost of living crisis, more people face the risk of damaging their credit record and facing unaffordable borrowing costs.
“Even though a borrower may be accepted for a non-prime loan, the heavy financial cost will put even more pressure on their finances which are already near breaking point.”
TotallyMoney’s top five tips to credit score improvement:
By improving your credit score you can unlock the most competitive offers and the best rates, saving you money and helping you move your finances forward.
Check your report: It’s free to do and you can make sure that all the information available to lenders is correct and up to date. If you spot an error, you can raise a dispute.
Get on the electoral register: Having your name on the electoral register can help lenders check your address and identity. Plus, if you've been at the same address for a while it can make you appear to be more settled and stable.
Credit building cards: These are designed to help build your credit score and improve your chances of qualifying for the most competitive deals. Check your eligibility before you apply. This can help you avoid being rejected which can act as a red flag to other lenders.
Manage payments: To get a good credit score, it’s important to show that you’re able to manage credit accounts. This means never missing payments and, if possible, you should always try to pay more than the minimum each month.
Credit utilisation: Try to use less than 25% of your available credit across each of your accounts. This will suggest to lenders that you’re in control of your finances.
Sources
* Research and calculations undertaken by Moneycomms.co.uk 22.09.2022
