If you work from home or have access to daytime TV, chances are you’ve seen one or two adverts promoting personal loans. It is also likely that you have seen or even responded to such ads, tempted by the promise of attractive “typical rates”. And statistically, around 1/3rd of you, responding to the ad have been disappointed to learn that the rate your saw on TV doesn’t apply to you.

So how can that be? How can a company purporting to offer loans at great rates (or at least great enough to warrant a response), get away with offering something different once you apply. The answer is in the description.

Buying a loan can be compared (in part) to buying a pair of shoes. Unfortunately one size doesn’t fit all. When brokers and lenders advertise their products, the rate you’ll see will always be followed by the word “typical”. No two loan plans are ever the same, and the rate you pay will very much depend on your financial circumstances.

However, for all intents and purposes loan providers are able to promote a rate that is typical of at least 66% of all customers. By definition, the rate you see tagged to any type of promotional material will be the rate that the majority of applicants receive, although 1/3rd of those who apply will not qualify.

So how do lenders decide who qualifies for the better rates?

The term of any loan is calculated using a tool called “risk based pricing”. In essence risk based pricing is a system of analysis, which determines the risk you pose to any lender as a potential borrower. Factors such as credit score; residential status and age are some of the measures used towards the final calculation. The lower the risk you present as a borrower the better the overall rate offered to you will be.

What factors affect my credit score?

There are many factors that contribute towards your overall credit worthiness. Although this list is by no means exhaustive, some of them include: -

• Your proven ability to manage credit, expressed through previous loans, credit cards ect
• The duration of your credit history
• How much you owe on average
• Your tendency to source new credit

Is their any way of attaining my exact credit score before I apply?

Yes, if you would like to get a better understanding of your credit worthiness before you apply for a loan or any other form of credit, you could try contacting one of the following agencies: -

Equifax
Experian
Callcredit

Lenders will use any one of these agencies to obtain a copy of your credit information once you apply. However, they will be more than happy to provide a copy of your file to you directly, for a nominal fee.

In conclusion, typical rates are not designed to deceive potential applicants, in fact far from it. They are, in reality the only way a loan broker or lender can provide an accurate description as to what rate a “typical” customer is likely to qualify for. If you understand the mechanism used to promote a loan, you are less likely to be disappointed.