It’s tempting to try to apply for an unsecured loan if your debts are beginning to stack up. But lenders have become increasingly reluctant to offer this kind of credit, and as a myfinances.co.uk investigation has discovered, searching the internet for a specialist unsecured loan broker might mean jumping out of the frying pan and into the fire.
By Kate Saines and Matthew West
Getting a loan these days is not as easy as it was a few years ago.
Thanks to the recession, lenders are far less approachable, favouring only the most credit-worthy of customers. And even they are being charged sky high interest rates.
According to Moneyfacts unsecured loans are simply being dropped by lenders. In the last two years, it says, there has been a 37% drop in the number of lenders offering unsecured loans.
Head of Moneyfacts, Louis Kaszczak, says this is because the risk of customers defaulting is continuing to rise.
Apparently, when people hit money meltdown the first debts they will stop repaying are the unsecured ones.
Because of this lack of unsecured lending, many people are forced to turn to brokers who act as an intermediary or ‘middle man’ in providing access to these kinds of loans.
You might recognise some of these unsecured loan brokers from adverts or online. They promise to provide ‘cash fast’. They also usually provide ‘quick decisions’ within 24 or 48 hours. And many say that having a poor credit record really is not a problem if you want to take out a loan with them.
So how do they work? Most brokers will have a panel of lenders who they do business with. The broker will receive a wholesale price for the loan, which is lower than a consumer would be charged, and this is how they make their money.
For anyone in need of a quick-fix solution to their financial nightmare, this might sound ideal. What could be more helpful than a company which offers you access to a range of unsecured loans across the market, and doesn’t mind if you have a County Court Judgement (CCJ) against your name?
However, as with all things which sound too good to be true – there is of course a catch or two.
Firstly, many of these brokers charge fees. It’s not difficult to spot the companies which don’t charge fees because they will quite happily promote this fact on their website or advertising material.
However, we phoned around some of the companies which make no mention of fees in their adverts and all of them said they did require payment. In each case this depended on the loan amount.
The average amount charged for a £15,000 loan was between £50 and £60 and all the companies we spoke to said this was only payable if the loan application was agreed.
The fee itself might put many off applying. But if you still want to proceed – the message is to do so with caution.
Several years ago Citizens Advice issued a warning against ‘unscrupulous’ loan companies who were running a scam where they charged people a fee to borrow from them. Unfortunately, the loan failed to materialise.
Since then the Office of Fair Trading (OFT) confirmed, following an investigation into a another fee-charging lender, that there were a clear set of guidelines in place with regard to loan companies charging fees.
It said customers using an upfront fee-charging broker should be aware that if they but did not accept credit offered – no matter what the reason – they would be entitled to a refund, less £5.
So before using a fee-charging broker, make sure you know your rights.
It’s not just the fees that can land potential borrowers in trouble. There is another price to pay for receiving ‘easy’ credit and that comes in the form of inflated interest rates.
In our research we found the typical APR for an unsecured loan offered by one company, Best4Loans.com, was 42.6%. But its interest rates could vary from a very reasonable 7.9 per cent to an incredible 175%.
Best4Loans.com charge an upfront fee, based on an agreement in principle for a loan application, of £59.80 for a loan of £15,000. But this will be reduced if you make your first payment on the day you take the loan out.
However, as part of our investigation we also posed as a loan applicant who then decides to change their mind about going ahead with a loan. We wrote to UnsecuredLoanCompany.net, a ‘trading style’ of Best4Loans.com, within the statutory ’14 day cooling off period’ to test whether they would honour the fact that an applicant had changed their mind and return the fee paid to them in full as set out in their own terms and conditions, which state:
“13. Under Financial Services (Distance Marketing) Regulations 2004 you have a right to cancel your application within 14 days of receiving these terms and conditions and receive a refund. If You wish to cancel your application, You must write to UnsecuredLoanCompany.net notifying us. In this event We will refund your fee within 14 days of the date on which You write to Us to cancel your application. Any such requests should be made to: Customer Service Department, UnsecuredLoanCompany.net, Third Floor, Dale House, Stockport, SK1 1TB.”
At the time of publication they have yet to respond to the letter we sent – by recorded delivery to ensure its arrival and dated 21st January 2010 – and there has been no recognition of any correspondence.
FC Loans, meanwhile, also charge a fee for those accepted for a loan and this would be £49.99 for a person borrowing £15,000. This company promises an instant decision, a payout within 24 hours and does not mind – it says – lending to customers with bad credit records or CCJs against their names.
Frances Walker, of Credit Action, says products with interest rates such as this should be approached with caution and she says people looking for a loan should only use these companies as a last ditch option.
“If you have any alternatives,” she says, “you should not use these people because interest rates are high.”
She adds: “If you are absolutely desperate for money and have nowhere else to turn you may have no choice but to use expensive forms of credit.
“If you need cash for the short term, for a boiler that has broken for example, it might be worth looking at a pawn broker or doorstep lenders. But even then make sure you look into them properly.”
In a report to the OFT on high cost credit last year the Citizens Advice Bureau raised another problem surrounding brokers.
It said it had seen cases where consumers had been offered a sub-prime loan purely on the grounds it was the only one available to them.
The point being, they were not given a full overview of their options.
The report said: “We believe that consumers currently lack the information to assess whether they might in reality have had more options. Given the structure of fees and commissions for intermediaries, this could create the conditions for mis-selling.”
Many of the brokers supplying unsecured loans do so via a ‘panel of lenders’. This does not mean they provide access to every single loan on the market, only that they do business with a selection of lenders.
Customers, therefore, are not always benefiting from the ‘whole of market’ sales approach.
Moneyfacts’ Michelle Slade says when looking for personal loans scouring the market is essential to finding the best deal.
“With a £1,055 difference between the cheapest and most expensive £5,000 personal loan, shopping around is key,” she says.
When ‘shopping around’, however, make sure you do so by checking out the APR and comparing them to other deals. Each loan you apply for will be registered on your credit record, so it is important to only go ahead with an application when you are sure you are going for the most suitable option.
If going to an unsecured loan broker ask them, before giving them any personal details, what fees they charge, what their typical APR is and which companies they have on their panel of lenders.
You might be able to get a better deal by approaching that lender yourself.
The final pitfall of using these firms is quite obvious. If you are seriously considering using them, it is probably because you are struggling financially. So would taking out more debt really help matters?
Sue Edwards, head of consumer policy at Citizens Advice, says: “Trying to borrow your way out of debt almost always just makes things worse.
“Many loan providers make speed and ease of access their main selling points, and if people have an urgent bill to pay or are being hounded by debt-collectors this can be very tempting.
“But you need to look closely at the terms of any credit agreement.”
Ms Edwards also says people should think carefully before resorting to high cost borrowing.
“Once you’ve taken out one loan it can be very difficult to avoid being sucked into a cycle of borrowing more each month just to get by and pay off the last loan, so the amount you owe can quickly get out of control.”
One broker, Best4Loans.com, promised loans with rates from 7.9 per cent APR to an astonishing 175% APR, with the typical rate of 42.6%.
They charge an upfront fee, if you are accepted for a loan, of £59.80 for a loan of £15,000 but this will be reduced if you make your first payment on the day you take the loan out.
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