There are lots of lenders and comparison websites that allow people to get a personalised quote without affecting their credit rating. Photograph: Getty Images
Underhand tactics by leading personal loan providers are costing Britons hundreds of millions of pounds a year, it was claimed this week. A report says many banks and other companies are “punishing” people for shopping around for a loan because they carry out an unnecessary type of credit check that leaves a mark on their file and can damage their credit rating.
However, it is easy to avoid this problem because there are lots of lenders and comparison websites that allow people to get a personalised quote without affecting their credit rating.
So which banks and lenders punish people, and which ones don’t? And who is offering the best loan rates?
The report was issued by the high street bank TSB, which is one of the lenders that runs a fairly clean ship when it comes to personal loans.
It is estimated almost one in 10 people in the UK have a personal loan, and in recent months something of a price war has broken out. Rates have fallen to as low as 2.8%, and with some banks such as Lloyds and First Direct letting people max out their loans by allowing them to borrow up to £50,000 as opposed to the traditional maximum of £25,000. The average personal loan is said to be around £10,000 over four years.
However, in its new report, TSB claims the market is “broken”, and that consumers are losing out by as much as £400m a year as a result. The single biggest problem, it says, is the checks some banks carry out when people apply to borrow money.
So what’s happening? Research carried out by the bank found that 61% of mainstream loan providers didn’t give people applying for a loan their final, personalised interest rate without completing what’s known as a “hard” credit check. This type of search leaves a mark on your credit file.
“If you make a lot of applications in a short period it is likely to damage your credit score, and you’re less likely to be offered the best loan rate. This is especially the case if the applications are unsuccessful, as this can further negatively impact your credit score,” explains the free credit-checking service ClearScore.
However, several banks and lenders, including TSB, will give applicants a personalised quote without affecting their credit record by using a so-called “soft search”. If they don’t like the look of the rate, they can go off and try somewhere else. Soft searches can’t be seen by lenders, so you can do it as much as you want.
Give me an example
Lucy wants to borrow £8,000 for her first car. She finds a loan with an advertised rate of 3%. She applies and a hard credit check is carried out. The lender says she can’t have the 3% rate – she can only have 9.9%. So she shops around and has a similar experience with three more providers. The fifth lender she tries offers her 4.9%, which she accepts. However, if she hadn’t accumulated four hard credit checks, from the four previous applications, she would have been eligible for a rate of 3.1% from the fifth provider, meaning she will pay an extra £375 in interest over the life of the loan. (This example is described as an “indicative case study based on TSB internal analysis”.)
What do other people say? Andrew Hagger at financial website MoneyComms.co.uk told Guardian Money: “I’m not sure the problem is as bad as it’s made out to be.” He suspects the majority of people looking for a loan would use a price comparison website, and these typically offer soft search tools that let you check out deals without affecting your credit record.
Kevin Mountford, banking expert at MoneySuperMarket.com – one of the sites where searching won’t harm your credit score – says the biggest issue is that no one really knows the extent of the problem. With many lenders, their terms and conditions mean that by asking for a quote, a consumer is in effect giving the lender permission to carry out a hard check, he adds.
Hagger says that in order to give more clarity to consumers about the checks that are carried out, perhaps the regulator should insist on some form of standard wording on loans websites. Guardian Money found that some websites weren’t at all clear about whether an application would have any impact on someone’s credit file.
Lenders that do hard checks
Leading lenders that won’t give people their final individual quote until they have undergone a hard credit check include Santander, whose loans begin at 3.1%; Tesco Bank, with rates starting at 3.3%; and Clydesdale Bank/Yorkshire Bank, with rates starting at 3%.
Santander says: “We do not use soft searches, but we continually monitor our policies to ensure we are in line with the market and make changes where we can.”
Tesco Bank says: “When a prospective customer applies for a loan, we want to give them complete certainty over the APR rate they will receive, which is why we perform a hard credit search on new customers.” However, it offers some of its existing banking customers provisional approvals for loans, based on the information it holds.
Clydesdale/Yorkshire says: “We are always looking to improve our processes to make life easier for our customers, and are reviewing how quotation searches can be best employed for customers before a formal application is submitted.”
… and those that don’t
Aside from TSB, they include HSBC, Ikano Bank and RateSetter, plus the Halifax, NatWest and Barclays (with the last three you must be an existing customer).