We use cookies to allow us and selected partners to improve your experience and our advertising. By continuing to browse you consent to our use of cookies. You can understand more and change your cookies preferences here.


When you click on a retailer link on our site, we may earn affiliate commission to help fund our not-for-profit mission.Find out more.

16 Feb 2019

Cheap 'teaser' loan rates costing borrowers £194m

Which? explains how to get the best rate on a personal loan

Borrowers could be paying hundreds of pounds more than the best advertised rates for personal loans because they aren't offered the rate they apply for, new research reveals.

Analysis from the Centre for Economics and Business Research (Cebr) for Shawbrook Bank found there is a significant gap between the rate advertised by lenders and the actual rate offered to applicants.

The research found the average representative APR advertised by UK lenders for a typical loan of £9,000 was between 2.8% and 5.5%. However, the typical APR secured by borrowers was much higher at 7% APR.

This means borrowers could end up with repayments that are 150% higher than what they budgeted for. Cebr estimates this is costing borrowers an eye-watering £194m each year.

Which? explains why lenders are able to advertise low rates but offer different deals, how to get the cheapest personal loan and the alternative options that could fit for your borrowing needs.

Be more money savvy

Get a firmer grip on your finances with the expert tips in our Money newsletter – it's free weekly.

This newsletter delivers free money-related content, along with other information about Which? Group products and services. Unsubscribe whenever you want. Your data will be processed in accordance with our Privacy policy

Why are lenders allowed to offer a different rate?

In the UK, personal loan providers advertise the 'representative APR' on deals. Confusingly, however, they don't actually have to offer this rate to everyone that applies.

Lenders are only required to offer the best rate to 51% of applicants, meaning the remaining 49% that attempt to secure the deal may be offered a more expensive alternative.

The gap between the interest rates advertised by lenders and the rates being paid by consumers has widened significantly since 2011, according to Bank of England data - growing from 1% to 3%.

Source: Bank of England

Typically, the only way to find out which rate you'll be offered is by applying. But before approving a loan, most lenders will do a 'hard credit check' on your record, creating a footprint on your credit report.

If you don't get the rate you expect, you face a tough choice: take the more expensive rate or risk damaging your credit history.

Rejecting the offer and applying for a different loan else will put another search on your credit report. A large number of footprints in a short time period could impact your credit rating and cause lenders to view you as a risky choice.

How to get the cheapest personal loan

If you are thinking about applying for a loan there are steps you can take to give yourself better odds of securing the best rate.

Boost your credit score

To be among the top 51% offered the lowest rate, you'll need to stand out from the crowd. So as a first step, you should check your all three of your credit reports to see if your rating is in good shape.

You can check your credit score for free at the three main credit reference agencies: Equifax, Experian and TransUnion (formerly Callcredit).

When checking your report, look for any mistakes that could impact your score and take action to rectify them before you apply.

Go for personalised quotes

Some lenders offer personalised quotes which use a 'soft search' that doesn't show up on your credit report.

This could allow you to find out the rate you'll be offered without leaving a trace on your credit report.

Lenders that offer personalised quotes include Shawbrook Bank, TSB, Zopa, RateSetter and HSBC.

Check the small print

Before you apply for a personal loan, check the small print. There could be some terms and conditions that mean you aren't eligible for the lowest rate in the first place.

Sainsbury's Bank, for example, reserves its best rate for Nectar card holders, while others like, First Direct, only offer the best deals to existing customers.

What to do if you're offered a worse rate

If you're presented with a rate you weren't expecting, you don't have to accept the deal.

You could try to find a lender that uses soft credit searches to create quotes and apply there if the deal is better.

Another option is to consider applying for a credit card instead.

With a credit card, you can clear the balance every month to avoid interest or you could go for an interest-free credit card.

These deals also have headline offers, but it works slightly differently. All applicants will be given a 0% period but, for some, the time limit may be shorter or the revert rate may be higher.