Personal loans: beware the ‘representative’ rate

Anyone seeing such a low rate could be tempted into needless debt

You may be better off picking up a bag of Percy Pigs at M&S than a loan application (M&S)

Loans are getting cheaper and cheaper. This week M&S Bank sent out a press release trumpeting its lowest ever loan rate. It’s charging just 3.5 per cent APR (representative) on loans between £7,500 and £15,000.

Now, while that may seem like great news if you need to borrow a barrowful of cash, you shouldn’t be focusing on the 3.5 per cent part of the deal. In fact, the key word to consider in the offer is “representative”.

What that means is that if you are pretty well-off and probably don’t really need a loan, you might qualify for the low 3.25 per cent rate. But if you have a financial emergency, such as needing a new car which you can only afford by borrowing, I’m pretty sure you won’t get the low rate.

Instead you’ll be offered a loan at a much higher rate. If you can afford it that may not be such a terrible outcome, but the danger is you end up agreeing to a deal that you can’t really afford.

It can easily happen. I’ve known people who’ve worked out what their repayments will be at the quoted “representative” rate and then ended up signing up to a much more expensive deal after applying for the loan.

Here’s the problem. Anyone seeing such a low rate could be tempted into needless debt. I’m not having a go at M&S or any company offering personal loans, I just worry that at that low price, people who can’t afford to pay the higher rate they will almost certainly be offered will tie themselves to a financial commitment that will bring woe.

Some people tempted by the low headline rate will simply be turned down for the loan, which will give them financial problems in the future. That’s because it will be recorded on their credit record, making it harder for them to get affordable loans in the future.

The answer is simple: force companies to put the range of rates they offer and reveal how many applicants they accept. So a firm should say: “We offer loans from 3.25 to 10 per cent and turn down three out of four people.” That would reduce the temptation to take out easy loans at a stroke.