Andrew Hagger, Head of News and Press at moneyfacts.co.uk, talks about how more and more providers are switching to a risk-based approach to lending and how there needs to be independent regulation to make sure that 66 percent of consumers who are approved for loans get the typical rate that was advertised.
"As if shopping around for a personal loan or credit card wasn't hard enough because there are so many different terms, conditions, and rates, consumers should also be aware that they might not get the rate that was advertised.
"Recently, we've seen two big household names switch to risk-based pricing. First, Sainsbury's Bank moved away from fixed pricing for their credit cards. And second, Egg's prices for personal loans are no longer the same for everyone.
"Even though 80% of loan providers already use standard rates, only 35% of card providers do. This makes the cards market seem a little behind. But because card companies need to stop the rising number of bad debts and also make more money from interest, they may soon switch to this pricing structure, which better reflects the risk.
"It's surprising that Cahoot is the only company to do this with overdraft fees. Some customers may get a better deal because the lowest rate is 9.8 percent, which is 2 percent lower than their usual rate. The highest rate is 14.8 percent, which is a rate that is often seen with current accounts.
"The CCA rules say that 66 percent of people who are approved for a personal loan or credit card should get the average rate. But so far, there is no proof that this rule is being followed."
"If there are no visible signs that the OFT is keeping an eye on this rule, then the rules could be broken, which would be bad for consumers.
"The latest OFT report focuses on reducing penalty fees, which are a big source of income for lenders. Risk-based pricing could be a "backdoor" way for lenders to make more money by advertising low rates to attract customers, but charging much higher rates to more than 33% of accepted applicants. In other words, a flexible way to lend money that could be geared more toward making money than taking risks.
"Consumers should know that they might have to pay a few percentage points more than the advertised rate. However, there are two sides to every story, and some people will get a rate that is lower than the average rate. It will depend on both the person's credit score and the score card of the service provider.
"Consumers have to fill out a credit application before they can find out what rate they will pay. This has made the market much less clear for people looking for the best rate.
"But people who traditional lenders may have turned down in the past may now be able to get a loan, though at a higher rate to account for the extra risk. The risk-based pricing method makes the market bigger for both lenders and people who want to borrow money.
"If this method is regulated in a way that protects consumers, it seems like a smart and responsible way to lend money, giving lenders more protection and rewarding people with good credit histories.
"Moneyfacts keeps in touch with the OFT to remind them that the 66 percent rule needs to be monitored proactively if it is to do what it was meant to do, which is to protect consumers.
It's not enough to rely on individual complaints and other groups like Trading Standards and Citizens Advice to point out problems with the ruling. A much more visible approach is needed, especially since more and more providers are now using "typical rates."
