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Loans & Credit

Good news at last: change is on the cards

Looking for a loan is about to get easier, but you'll still need to hunt around, says Joe McGrath

On 1 February new rules come into force to ensure that lenders advertise more accurate interest rates to customers who want to borrow money through loans or credit cards. One of the most important changes under the new Consumer Credit Directive is that lenders will now have display an interest rate – or annual percentage rate (APR) – that 51 per cent of customers are actually offered.

While this still does not guarantee that the advertised rate will be the one the customer is actually offered, it should be a better guide when sizing up the best available loans in the market.

Stefan Maryniak, personal finance commentator at uSwitch.com, explains it may take a while for these changes to filter through the market.

He warns: "It is a step in the right direction towards navigating consumers through the opaque lending market, albeit a cautious and tentative one.

"By forcing suppliers to give greater prominence to the facts in any advertising, the directive should bring greater transparency to the personal finance market."

For customers looking to take out a loan, options are still available for a range of different people on the credit scale, despite all the media reports that banks have been tightening their lending policies.

However, if you are serious about obtaining the best rate, there is a method to it, and if you are going to research the market yourself you should allow a good few hours to do so.

Alternatively, you can visit a licensed credit broker – similar to a mortgage adviser but a specialist in secured and unsecured loans – who will have access to range of products available only through intermediaries.

If you do decide to go through a broker, make sure that the broker has an up-to-date consumer credit licence and is a member of the Association of Finance Brokers (AFB), the industry trade body for best practice.

Robert Sinclair, director of the AFB, admits that price comparison sites offer consumers a lot of value, but they may not achieve the best deal for everyone.

He says: "You may be able to secure a better rate by going through a broker. Customers should look carefully at the interest rates being offered and try to secure the lowest APR that they can.

"Going through a broker not only means you can look at the market and find a good deal; it also means you are less liable to damage your credit rating by shopping around and leaving lots of footprints on your credit history."

If you prefer to do things for yourself, there is a set of rules you should follow to get the very best deal as there are hundreds of lenders out there.

First of all, you need to know your current credit standing. Most credit commentators will tell you that it is worth approaching websites such as Credit Expert – the online service from the Experian agency – to get your report.

There are other services online and most offer a free 30-day trial or equivalent. Just remember you'll need to cancel the sign-up once you have your report or they will charge you for it.

The lesser-known trick is to obtain your "behaviour score" from your bank (or banks). Bank managers can be reluctant to give you this, but you are entitled by law to see any information that the bank holds on you, so insist.

This number on its own may be meaningless, so ask what the bank's internal scale is for measuring your credit worthiness. You should also ask them for a quote for the amount you wish to borrow.

It might be that the bank can offer you a better rate than you can get from opening a new account because they know you better than anyone else from your financial behaviour in the past.

Once you have this quote, you should begin your sweep of the market. Go to the price comparison sites and call up all the available products. Do not look at the rate alone.

Whittle down the available loans by the minimum and maximum loan amount so you know that the lender can match the amount you need. Then look at the additional advisory information that sits in the information box on each lender's product profile.

If a product stipulates that it is purely for customers with an excellent credit profile and your credit report shows you are just above average, ignore it. The chances are you won't be approved and you will leave a "footprint" on your file, which could discourage other lenders from approving you.

If you think you have an average or a poor credit profile, look for lenders with a wide spread of interest rates. Although some may advertise headline rates of 9 per cent, they may offer an acceptance spread between 7 per cent and 20 per cent, say, so you will have more chance of being accepted.

Also look at the average acceptance rate, which some price comparison sites now display. This will give you a guide as to whether or not you are likely to succeed.

If you have a good or excellent credit rating, the search may seem simple, but you should also be aware of peer-to-peer lenders, independent of traditional banks and loan companies, as these could offer you better rates.

Social lenders such as Zopa, Quakle and Yes-Secure offer loans that are funded by other consumers who hope to make interest on the money they lend you. As a result, the rates are often higher.

Josselin Digny, co-founder of Quakle, says the concept of peer-to-peer lending is now well established, but she adds that even within this sector, there are differences between providers.

She explains: "Quakle is different because we combine lending with true social and community networking. Not only do we encourage people to get to know each other on the site, but they can join forces to form groups.

"People's reputation scores are affected by the financial behaviour of their peers and vice versa. This peer group community encourages people who are good with money to stick together and support each other. Naturally, we work hard to ensure that lending via Quakle is safe and we vet borrowers very carefully."