The folks at TSB Bank are unhappy about the way consumers are being treated by ‘a number of players’ in the personal loans market. Mohamed Dabo looks at a report issued by the bank

According to researchers at TSB, which is part of Spanish banking group Sabadell: “Consumers can only borrow well when the financial services industry enables them to do so.”Its report identifies that underhand tactics by a number of players are resulting in three undesirable outcomes for consumers:

  • Consumers are being punished for shopping around through unnecessary hard credit checks;
  • Consumers are being kept in the dark about important product features which could save or cost them money, and
  • Consumers may feel trapped with their current provider as there is no easy way of switching their personal loan to another provider.
The right way to do it
In order to borrow well, customers need to be given the opportunity to shop around for different products so they can work out which ones are right for them.As a starting point, when a customer sees an attractive interest rate, they need certainty that they can benefit from it before they commit to taking out a personal loan.

Some banks and lenders, like TSB, provide consumers with a personalised quote at the point of enquiry without affecting their credit record. This makes clear what interest rate a customer will be offered if they are accepted for the loan.

And it provides certainty to a consumer before they proceed with a loan application about the rate of interest they will have to pay if they choose that provider.

Then if they do not like the offer they have been given, they can easily look somewhere else without any effect on their credit record.

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Customers are being punished for shopping around 
Nearly 61% of open market loan providers – the companies from which consumers can apply for a loan without having an existing relationship – however, do not show consumers their final, personalised interest rate without completing a hard credit check.These providers make customers apply for a loan without giving them any certainty about what interest rate they will be offered before they apply. This means that if a customer is unhappy with the interest rate they are offered and decide to look elsewhere, each and every time they go to one of these providers, they will get a mark on their credit score.

Over time, this can restrict the amount of credit they will be offered because these hard credit checks will appear as multiple credit searches on a consumer’s credit record and can be seen as a potential indicator of risk.

Not only could this result in a customer having to pay a higher price for lending, it could also increase the probability that a customer will be declined. By behaving in this way, almost two-thirds of open market providers are effectively punishing consumers for shopping around.

Compare this behaviour to nearly any other industry – when a customer shops around for a new car or washing machine, they will usually get the product they want at the lowest possible price; in the loans market, this same behaviour could paradoxically see a consumer getting a more expensive deal, or potentially no deal at all.

“We believe that this practice of preventing and punishing consumers for shopping around could be costing them as much as £400m each year,” the TSB report says.

More worrying still, is the fact that so few consumers are aware that the industry is doing this.

A recent survey conducted by YouGov for TSB found that 40% of consumers who have taken out a personal loan in the past five years have no idea whether or not they received a hard credit check when they asked for a quote.

Many providers hide important product features from consumers

Consumers need to be given the tools to be able to work out which product is right for them.“At face value, loans seem like straightforward financial products – in fact 78% of the people we surveyed felt this was the case – but we believe that there is a false transparency in the personal loans market where key product features, fees and charges are often deliberately obscured from consumers,” TSB says.

“In fact, we think that there are at least five key features and charges that customers need to be aware of before they request a quote or apply for a loan,” the bank adds.

But what is incredibly telling is just how few consumers feel they have this information before making a decision on a personal loan.

Recent research conducted by YouGov found that 39% of consumers who have taken out a personal loan in the past five years were unsure if their provider offered them a repayment holiday, while 27% were unsure if they could make overpayments, and 27% were unsure if there was an Early Repayment Charge for paying off the loan early.

The research also found that one in 10 consumers with a loan did not feel their provider was clear enough with them about the interest rate they would be offered – the most basic, critical aspect of any loan product.

This clearly indicates that rather than be transparent with consumers, many in the industry are instead keeping consumers in the dark over key product features. What is more, these providers are benefiting from this culture of opacity as without more transparency many customers will not realise that they could get a better deal elsewhere.

Customers feel trapped with their loan provider
Even if consumers are provided with enough information to make an informed decision on a personal loan product, existing personal loans customers looking to switch their provider may find themselves unable to take advantage of better deals.While they may not currently work for all consumers, most retail products have their own switching services.

Unlike the current account market, which has the Current Account Switching Service, the ISA market which benefits from ISA transfer rules, or the credit card market which allows balance transfers, personal loan providers do not provide a mechanism for customers to be able to switch easily.

Instead, customers are told to “do it yourself” – and this is no easy process. If a customer wants to switch their loan provider, the first thing they have to do is get an early settlement quote before shopping around – this will let them know if it pays to switch.

Once they have this, they cannot just transfer their existing loan to another provider – they will need to take a new loan out with someone else while the other one is already open and then pay their first loan back manually.

Unlike ISAs or credit cards, this means customers have to have two loans open at once in order to be able to switch.

In loans, the skewed market is therefore resulting in an environment where customers have to take on more debt in order to benefit from cheaper lending. And in many circumstances, this may lead to perfectly financially solvent customers being refused lending, with the new lender unable to be certain that the old loan will be closed.

Customers may therefore be unfairly assessed on their ability to meet repayments on both loans, even though the vast majority will close their old loan straight away. This unnecessary hassle for customers is also particularly challenging for financially vulnerable individuals.

As a result of all this, customers may feel trapped with their current provider and unable to benefit from lower prices, or a product that better suits their financial situation.

“We believe that the combination of these three major failings in the personal loans industry is resulting in a market that is not working for UK consumers,” TSB concludes.