UK borrowers could be paying as much as two-and-a-half times the headline APR advertised by some personal loan lenders, leading to an estimated £194m extra being paid by borrowers each year, according to new analysis conducted by the Centre for Economics and Business Research (Cebr) on behalf of Shawbrook Bank.
The analysis shows that the average representative APR advertised by UK lenders for a typical loan value of £9,000 ranges from just 2.8% to 5.5%, but the average APR paid by borrowers for a fixed rate personal loan is 7.0%, which is an increase of up to 150%.
Although the gap between the interest rates being advertised by lenders and the interest rates being paid by consumers has widened significantly over the past 10 years, this difference has narrowed marginally over the past 12 months.
The narrowing of the gap reflects the slowdown in consumer credit growth that has taken place in recent months. The latest figures from the Bank of England reveal in November 2018, the UK's annual rate of credit growth dropped to its slowest rate since March 2015.
"The gap between consumers' expectation and reality when it comes to the cost of personal loans continues to be fuelled by the practice of 'teaser pricing'. The lack of transparency surrounding the loan application process is not only confusing to some consumers but in certain cases could be costing them money," said Paul Went, managing director, Consumer at Shawbrook Bank. "Collectively, households in the UK are paying millions of pounds more in loan servicing costs than initially expected. The disparity between representative APRs advertised by lenders and the APR actually paid by borrowers shows no sign of relenting and consumers should be wary of this when applying for a loan."
How to find the best deal
When determining how much interest to charge borrowers, a lender will look at a number of different factors, including the borrower's credit rating. To help find the best deal, here are some tips borrowers could consider:
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