Created by: John Fitzsimons | 31 October 2018

Why you might not get the advertised rate on your personal loan

There are a few important questions you need to answer before you take out any form of credit, whether it’s a credit card, a personal loan or a mortgage.

For starters, you’ll want to establish exactly when the loan needs to be paid back. The next big question is just how much the loan is going to cost you.

Generally, you’ll look to the interest rate in order to work that out. But when it comes to personal loans, expecting to get the advertised interest rate can be a costly mistake.

What is a representative APR?

When you compare personal loan deals, you’ll see a representative annual percentage rate (APR) displayed. This is the interest rate that you’ll have to pay on the loan, and it can vary significantly depending on the size of the loan you’re looking to take out.

For example, if you’re looking to borrow £5,000 over a five-year term then you can get rates from around 3.5% APR, but go for a £15,000 loan and the rates on offer drop down to as low as 2.8% APR.

However, not everybody who is approved for a loan will get this rate. Unfortunately, lenders only have to offer this representative rate to 51% of successful applicants.

In other words, almost half of borrowers who apply for that rate and are approved may be offered a higher rate of interest. As a result, the loan will cost them more to pay off.

Who gets offered a higher rate?

It will all come down to your credit rating. Borrowers with the best track records with credit are more likely to be offered the representative APR.

If you have a more patchy credit history, perhaps because you have missed a payment or two in the past or you simply haven’t had credit before, then there’s a good chance that even if you are approved, you’ll be offered a higher interest rate.

Some lenders offer an eligibility checker, to give you an idea of how likely you are to be approved for a personal loan before you make a formal application. This can be a useful tool, as this doesn’t leave a footprint on your credit score. Read more about footprints in Hard searches vs soft searches: what difference do they make to your credit score?

However, while this will help you work out if you’re likely to get the loan, it doesn’t offer any indication on whether you’re going to be one of the 51% that gets the representative APR, or whether you’ll end up on a more expensive interest rate.

Improving your chances of getting the advertised APR

If the best rates are only offered to borrowers with the most polished credit histories, then clearly you need to take steps to improve how yours looks if you want to get the advertised APR from any loan you apply for.

That means going through your credit record to see where you can make improvements. That may mean closing old cards and accounts that you no longer use - lenders tend to get nervous if you have a lot of untouched credit already at your disposal - or signing onto the electoral roll.

If you have a very limited credit history, then looking to a credit builder credit card is a good move. These cards are specifically designed for borrowers like you, and come with only a limited amount of credit.

While the APR will generally be higher on these cards, that’s only an issue if you don’t pay the balance off in full each month. So just do a little bit of spending on the card, set up a direct debit to clear the balance in full after your statement, and in no time you’ll have an improved credit score.

For more, read 7 ways to improve your credit score fast.