Two Thirds of Lenders Using Underhand Tactics For Consumer Loans

Around 1 in 10 people taking out a loan in Britain do so simply to make ends meet. The market for these loans is extremely unfair – and this is not coming from a consumer pressure group but from one of the bigger banks, TSB.

On BBC 4 Radio this morning, Chief Executive Paul Pester of TSB suggested they had conducted a study of the market for household lending. The results were quite revealing, Pester suggested that about two-thirds of loan providers are using underhand tactics, unnecessarily costing UK consumers around £400 million.

According to Pester, its extremely difficult for customers to understand what they get when they buy a loan. Most of the time borrowers don’t understand what happens if they pay off their loans early and how much it will cost them.

Moreover, Pester said that borrowers can’t switch their loan after a couple of years if they see other lenders that provide better rates – there is no switching service.

However, what was more shocking to the chief executive was that the more a borrower shops around for a good loan deal, the more it is likely to cost them!

This is because the more astute borrower may want to look around for the best loan deal. However, this often leaves a hard credit footprint on the borrower’s credit profile – which means lenders will most likely charge the borrower a higher rate.

According to Pester, two-thirds of loan providers will effectively leave a footprint on your credit profile you simply ask about the price of a loan. Indeed, the mark on the profile makes it seem like you have taken the loan out!

In sum, borrowers struggling to make ends meet, ending up paying more if they do the sensible thing of shopping for the best loan deals. Pester estimates that this ends up unnecessarily costing UK consumers an extra £400 million every year.

For an economy that is systemically dependent on household debt, this type of behaviour by the banking sector is not surprising. The level of consumer debt to household income is reaching worrying levels, and those on the lowest incomes are being punished for shopping for the best loan deals.

The main policy solution to these problems is to encourage households to take on even more debt. Instead, at Positive Money we believe the Bank of England should to cooperate with the Treasury in order to finance a fiscal stimulus with newly created money (for more information click here).

Most importantly, this would increase people’s incomes without households having to take on more debt! We would be less dependent consumer debt, and less susceptible to these types of underhand tactics.