The difficulty of comparing personal loan rates without damaging your credit rating is a major hurdle for borrowers trying to get a good deal.
At present borrowers are likely to have their credit history sullied by shopping around for a loan, which may prevent them from receiving competitive rates in the future.
Traditional comparison sites, such as Gocompare.com, Moneyfacts.co.uk, and uSwitch.com, base their best-buy personal loan rankings on lenders’ advertised “typical rates”.
* Credit records are being sullied unfairly
* What is on a credit report?
Although, by law, lenders have to offer at least two thirds of borrowers these advertised rates, this applies only to those who are accepted for a loan. Only a quarter of people who apply for a loan will be able to borrow at anything like the advertised rate, and borrowers will only know if they are in that category after they complete an application.
Each application leaves a mark on a borrower’s credit record, diminishing their chances of being eligible for a reasonably priced loan. Because a credit file does not not show whether an application was successful or not, it can look as if a borrower was desperate for finance, which makes lenders nervous.
The comparison website Moneysupermarket.com says that the proportion of successful unsecured loan applications has fallen from 40 per cent to 32 per cent over the past year as lending criteria has tightened.
Thelendingwizard.com works by carrying out “soft” credit searches on borrowers through a credit reference agency. Unlike “hard” searches used by banks for loan applications, these do not show up on credit records. The searches allow borrowers to see what loans they will be eligible for, and at what rate, before they need to apply direct to the lenders.
Borrowers fill in one application form, stating how much they would like to borrow and for how long, including financial details, such as salary, mortgage and any debts. Thelendingwizard.com will retrieve a handful of quotes from participating lenders, or let you know if you are likely to be rejected, all without damaging your credit profile. The site receives about 200 visitors a day at present, and there are only a few lenders on board, meaning that borrowers’ options are limited. But Olivier Beau de Loménie, the managing director, says that other loan providers are warming to the idea and the site is in talks to add more.
At present the site offers tailored quotes from lenders including Black Horse, yourpersonalloan.co.uk, Nemo, Moneyway and Blemain Finance.
Martyn Saville, senior researcher at Which?, the consumer organisation, believes that using soft searches is good for consumers, but he points out that banks will offer soft searches or “quotation searches” if asked individually. “The default for banks is the hard search,” he says. “They won’t proactively offer customers a quotation search, but you are entitled to one.”
Moneysupermarket.com has been exploring the possibility of offering soft-search comparison software for the past year. Tim Moss, head of loans for the website, says that the software, which is “very close to launching”, could be a “game changer”.
However, Mr Saville warns that using comparison websites involves the risk of sharing all of your bank details with a third party. “Going direct to your bank cuts out the middleman,” he says. “Ultimately, it is better to improve your circumstances before applying for a loan, rather than find a loan to fit your circumstances.”
For those who want a personal loan from the high street, Mr Moss urges borrowers to ask their own bank first. “The best deals on loans are increasingly available only to current account customers,” he says. “The safest haven for nervous lenders is their own customer base.”
Nationwide, for example, has an existing-customer personal loan with a typical rate of 7.9 per cent of £7,500 to £14,999 for up to five years. Abbey offers a typical 8.9 per cent on £5,000 over three years to those who have a current account with the bank.
Egg and Barclays both offer rates of 14.9 per cent for their customers, and HBOS charges 19.9 per cent on a loan of £5,000 for three years.
Boost your chances of a successful application
All borrowers can maximise their chances of being accepted before applying for a loan.
First, Martyn Saville, of Which? says: “Use a credit reference agency to check your credit file for errors and make sure that you are on the electoral roll. This is key.”
He adds: “It is worth noting that if you have a county court judgment against you, it won’t appear if you settle it within a month.”
Keep on top of all bills, too. Tim Moss, of Moneysupermarket.com, says: “Missing a £20 mobile phone bill or a catalogue bill will now lead to rejection for credit.”
Some lenders will also turn down borrowers with credit records that are “too clean”. Banks want to see a proven track-record of handling credit. If you are concerned, you could open a joint account with someone who has an established credit record to improve your profile. But if you open a joint account with someone with a poor credit score, yours will suffer, too