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12 April 2017, 01:00

Effective Interest Rates On Loans Double The Advertised APR

  • Average advertised High St APR is 3.5%

  • Average effective interest rate is 6.9%

  • Customers paying highest rates to subsidise loss leading APRs

Someone taking out a personal loan pays on average twice the advertised APR according to analysis of loan interest rates by The Centre for Economic and Business Research (CEBR) on behalf of Saga Money. The average loan APR available on the High Street is 3.5%, but Bank of England data shows that effective interest rates are typically 6.9%.*

This suggests a massive disparity between the headline rates advertised prominently on the banks’ websites, and the actual interest rates faced by customers. This is likely to be because of two factors: credit scores and loan size.

  • Credit Scores - The impact of less than perfect credit scores, which are often not the fault of the applicant. Because some providers do not take into account anything other than earned income when calculating someone’s credit score, people who derive income from a variety of other sources such as pensions and investments can be adversely affected and this includes many older people. Often they are pushed into a riskier lending category, leaving them facing higher-than-representative interest rates.
  • Loan Size - Many loans fall outside of the value range for which the most prominently advertised interest rate applies. Advertised APRs are usually based on a loan size of around £7,500 - £10,000 as loans of this size are appealing to lenders as they typically take longer to pay off and therefore banks can earn more in interest. However those that want to borrow a smaller amount will typically pay much more than the main advertised APR. Loans for £5,000 by major banks currently advertise an APR of anything up to 13.9%.

Under FCA guidelines the advertised APR offered on personal loans must be taken up by 51% of those who are accepted for a loan, the remaining 49% will be offered risk based pricing which accounts for the higher effective interest rates. In essence the 49% who pay sometimes significantly more are subsiding the low rates offered to those who lender deem to be a good risk.

Gloria Barker, head of personal loans at Saga commented: “Consumer awareness of the way the personal loan market works is low. Over half of people are unaware that even when accepted for a loan they may be offered a higher rate than advertised and by the time they discover this they are likely to have already left a footprint on their credit record. More needs to be done to make people aware that the rate advertised is not the rate they will necessarily get.”

Saga offers unsecured personal loans from £1,000 to £25,000 over one to seven years. It offers a single, flat rate of interest which all successful applicants receive.


Notes to editors

*At the time of analysis (25th January 2017), the following interest rates were advertised prominently on bank websites

** Populus interviewed 2,108 nationally representative UK adults, all aged 18+ online between 21st and 23rd December 2016. 1,027 of these respondents were aged 50 or over. Populus then boosted the sample with 348 respondents aged 50 or over who had been accepted for a loan in the last three years, to make a total of 500 respondents overall. Data was weighted to be nationally representative. Populus is a member of the British Polling Council and abides by its rules; for more information

About Saga Personal Loans

Saga is offering unsecured personal loans from £1,000 to £25,000 over one to seven years. It offers a single, flat rate of interest of 7.9% APR that all successful applicants receive. The loans are provided by Shawbrook Bank Limited

Applicants must be aged between 50 and 75, own their home in England Scotland or Wales, and have a single or combined income of at least £12,000, which includes pensions and income from savings and investments.

Applicants can find out whether or not they will be approved for a loan without it affecting their credit score, initial applications go through a ‘soft’ credit search, without it leaving any trace visible to other lenders. With a soft search, we will let applicants know whether we are likely to approve them for a loan without leaving a mark on their credit score.

Only when people confirm they wish to go ahead with the loan agreement, will the credit search be registered and visible to other lenders.

Contact information

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Angela Clifton

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