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9 Dec 2018

New loan grows cheaper as your credit score improves: is it worth using?

If your credit score goes up, your loan repayments shrink

A new type of personal loan will offer customers a lower rate if their credit score improves over the term of their deal.

Personal loan rates are normally fixed for the entire length of your deal, regardless of how your credit score changes. So if you've got a poor rating and can only get a high-cost loan, you're usually stuck with that rate for the whole term - which could be as long as 10 years.

Under a new loan from LiveLend, however, the rate you pay will go down as your score increases. But with a comparatively high initial interest rate, would you actually be better off?

Here, we explain how the LiveLend Reward Loan works and how it compares to the rest of the market.

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How does it work?

LiveLend is offering loans ranging from £1,000 up to £12,000 over a term of 12 to 60 months.

The representative APR - which is the rate at least 51% of customers have to pay - is 14.9%. However, the firm offers personalised APRs ranging from 9.9% to 36.7%, based on your circumstances.

Borrowers can find out which rate they will be offered through a soft search on their credit record.Unlike a hard credit search, this won't be visible to other lenders and won't bring down your score.

When you take out a loan, LiveLend will check your Equifax credit score every three months throughout the term of your deal.

For every 25 points your score increases by, your loan rate will reduce by 2%. So, for example, if your Equifax credit score improves by 100 points over three months, your loan rate will reduce by 8%.

The lowest rate you can earn is 7.9% APR. After that, your rate won't drop further, even if your score improves. This means even those that secure the lowest initial rate of 9.9% APR have something to gain.

Who will benefit?

LiveLend estimates one in four borrowers will see their rate drop within the first three months, while half are expected to have their rate reduced after 12 months.

The firm told Which? those with lower credit scores will benefit the most, with 90% estimated to receive an interest rate drop over the life of the loan.

Of those who secure an improved rate, LiveLend predicts three quarters should see a reduction of 2-4%, while a quarter could see a significant change of as much as 18%.

How much can you save?

Which? asked LiveLend to provide an example of how the loan would affect a borrower that sees an improvement to their score.

It told us someone borrowing £5,000 across 36 months with a rate of 16% APR could save £182.12 by increasing their credit score by 50 points in year one and again by 50 points in year two.

The initial repayment would be £178.50, which would reduce to £172.53 at month 12 and £169.30 at month 24.

With these score improvements, the total interest paid would be £1,243.88, compared with £1,426 if the rate stayed unchanged.

Will the rate ever rise?

LiveLend has confirmed that if your credit score gets worse, your interest rate won't be put up. This applies even if you qualify for a reduced rate, then see your credit score spike.

There are no fees to open or close the loan either.

You also won't be charged if you miss a loan repayment - though it will be reported on your credit history, which is likely to impact your credit score and other borrowing opportunities.

How does it compare?

While the LiveLend Reward Loan put a new spin on personal loans, it's an expensive option when compared to the best deals on the market.

The lowest-rate loans currently available have a representative APR of 2.8% - significantly below the 14.9% from LiveLend. The lowest interest you'll ever pay with LiveLend is 7.9% and this requires you to significantly improve your credit score over the deal term.

Below, we've rounded up the best rates available when borrowing £7,500 over five years.

We've also indicated which providers will let you do a 'soft search' before applying.

ProviderRepresentative APRPersonalised APRs offeredSoft search available?Monthly repaymentTotal amount repayable
Cahoot Low Rate Personal Loan2.8%Up to 24.9%No£133.97£8,038.20
Sainsbury's Bank Nectar Personal Loan2.8%Up to 26.9%No£133.98£8038.80
Zopa Personal Loan2.8%Up to 34.9%Yes£134.11£8046.60
John Lewis Financial Services Personal Loan2.9%Up to 20.9%Yes£134.26£8,055.60
Santander Personal Loan3%Up to 24.9%No£134.63£8,077.80

Keep in mind that the best rates are usually reserved for people with strong credit histories.

Even if your score is less than perfect, it's still important to shop around. You can use 'soft searches' and providers that will show you the 'real rate' to help you find the right deal for you.

Is a rate drop guaranteed?

To gain the most from the LiveLend Reward Loan, you need to improve your credit score. That's because if your score doesn't improve, the loan won't get any cheaper.

It's worth pointing out that you shouldn't rely on the loan itself to help boost your score.

While making loan repayments on time is likely to increase your score, itmight not be enough to earn the 25 points needed to trigger a rate reduction.LiveLend also says its loan isn't designed as a credit-builder product.

It can be hard to know exactly how credit scoring works. In a recent Which? investigation we found many had no idea what everyday actions impacted their score - so make sure you have a plan before jumping in or you could be lumbered with a poor deal.

Read more:Credit scoring: are you in the dark?

How to boost your credit score

There is a growing range of products that can help you boost your credit score.

Using a credit-builder credit card, for example, won't cost you anything in interest as long as you repay the balance in full each month.

There's also an increasing range of alternative credit-building tools that don't require you to get into any debt at all to raise your credit score.

Loqbox , for example, is a free tool that allows you to repair your credit history by saving a set amount each month via direct debit.