Personal loans are changing

It's quite surprising to me but not only are interest rates accross various financial products like personal loans and credit cards increasing but lenders are also making changes to what customers can expect when applying for a loan, and who they offer a loan to.

It seems like there has been a surge in bigger one off interest rate increases following the credit crunch but this has also been accompanied by small tweaks and changes to the way interest rates are charged at various loan teir levels. This basically means that customers looking to borrow more may end up paying a higher rate of interest. This is something that has never been seen in the past.

This means lenders are tightening their lending criteria on personal loans as well as mortgages. Only a year ago if you borrowed upto £15K, for example, this was usually available at the lowest APR the bank would offer. However now you might now see lenders increasing the APR by 0.2 - 0.5% if you borrow over £15K. Although this isn't a direct tightening of lending criteria in terms of more stringent procudures to follow when considering a customers loan application it is a way for the banks to make more money which in their eyes is less of a risk. If you compare the cost of a £5K personal loan today to March 2007 you could end up paying nearly £400 more in interest over 3 years.

Looking at lending criteria again banks are now starting to consider each customers credit rating when they apply for a loan. Previously the banks would use their own internal 'credit scoring' system based on the details given in the customers application form, and so the customer was either accepted or declined. This means that customers who may have been declined in the past could now be offered a higher rate of interest. It also gives the banks some control on the rates they offer customers, something I think could end up costing the customers more and more in the long run.

If you think that a bank doesn't necissarily have to offer it's customers the rate they're advertising on a loan then this could leave perfectly good credit scoring customers paying more unecissarily. There is however an industry standard target of 66 per cent of customers that should get the headline advertised rate which at least gives consumers some confidence. Ultimately, it means that people with a bad credit rating end up being offered a higher interest rate which costs them more, which is rather ironic as these are the people who are most likely not to be able to afford the repayments and perhaps default, as per their bad credit rating. Perhaps it would be better for banks to consider this fact and not lend to these people.