Loan APR: What can I expect?

By Michael Strauss

The rates you see in loan comparison tables and advertising, by law, have to give the most prominence to what's known as the Typical APR of the loan offer. Basically, this figure represents the interest rate that two thirds or more of successful loan applicants will receive. The remaining 33% of applicants may receive an offer of a loan at a higher rate, or less commonly, at a lower one.

The reason for not being offered the same rate you saw when you applied is usually because of a process known as credit scoring.

Your Credit File

After you submit your loan application, the lender will request a copy of your credit file from one of the major credit reference agencies such as Equifax or Experian. This file contains details of your financial history such as successful or failed credit applications, late payments, bad debts, arrears, and many other aspects of your money activities.

This information is then combined with the other information you've provided on your application such as income, residential status, and profession. Each piece of information is given a specific weight or level of importance by each individual lender, which is used to come to an overall credit score which will be used to decide whether your application is successful. For example, a high income and being a homeowner will be valued highly and will boost your credit score, while missing lots of credit payments will be a negative factor dragging your score down.

Improving Your Credit Score

The upshot is that if you receive an offer of a loan at a higher APR than the quoted Typical APR, then you probably have something in your financial past or current circumstances that is affecting your credit score. If you find that more than one lender is unhappy with your score, then it's well worth aasking one of the credit agencies for a copy of you file - they have to supply you with it for a nominal fee of around £2.

Then, you can check that all the information on it is correct and insist that any errors are rectified. You may also discover a long-forgotten debt that arose, for example, by moving home and not informing someone of your change of circumstances. Clearing any outstanding debts such as this will be reflected in your credit file, and will help move your credit score back into the range where you have more of a chance of enjoying the competitive rates you see in the comparison tables.