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My Financial Loan Broker provide a service for those looking for payday and instalment short term loans. Such loans can help you address temporary cash flow problems or unexpected circumstances, and allow you to avoid costly overdraft fees.
Many borrowers are left scratching their heads when they apply for a personal loan or a payday loan and do not get offered near the rate that was advertised. Customers with good credit histories and a strong repayment record in particular are confused by this, as they would expect to get the best rates possible.
The reason for varying interest rates is simple. Lenders are required by law to advertise a ‘Representative APR’ which must be the rate given to at least 51% of customers. In other words, the average customer will receive this rate, as more than half of customers will be offered the Representative APR. But for the remaining borrowers, the rates that are charged could be higher than advertised, or even lower.
APR stands for Annual Percentage Rate, so is generally most relevant for longer term loans, especially if your loan terms are over a year or more. And with long term loans, even the smallest difference in APR can make a big change in how much interest you’d be repaying in total. But when it comes to payday and short term instalment loans, if the Representative APR varies slightly from the rate you are given, it may not make a huge difference to the interest overall.
So why might a lender offer you a different rate to the one advertised? We’ve explored some of the main reasons below.
All lenders must be authorised and regulated by the Financial Conduct Authority and one of the requirements is to carry out credit checks prior to funding a loan. Those individuals with fair or weak credit scores are deemed to be at a higher risk of default or likely to miss their payments.
As a result, they may be charged a higher rate than advertised in order to manage the potential risk of not paying back the loan, or paying it late. It also acts as an incentive for consumers to improve their credit ratings in order to access the best rates.
But wait, I have a good credit score? Why didn’t I get the best rate?
The role of affordability plays a significant role here. Whilst you may have a good credit history, the lender has to weigh it up against any other outstanding debts that you have, including credit cards, car finance, loans, and mortgages. Your outgoings will also play a part in your affordability, as will the number of your dependents.
In the application form, you will usually be asked about your number of dependents, monthly income and expenses. The lender will then calculate your affordability based on these metrics. They will need to give you an amount that you can borrow, at a rate that meets their level of risk.
Customers who have already successfully borrowed and repaid on time with their lender may be eligible for the rate advertised, or may be offered lower rates. This is because a level of trust has been built, and the lender feels at ease lending them money. However, the same credit and affordability checks apply, and if the borrower’s circumstances have worsened, they may not be eligible for the best rate, or perhaps for a loan at all. It is important the borrower remains in a position of financial stability, and does not get into significant debt.