Why haven’t I received the interest rate advertised for my loan?
Have you recently applied for a payday loan and have been accepted for credit, but are confused as to why you haven’t ended up receiving the stated interest rate for it? Perhaps this has left you feeling particularly dumbfounded as you have homeowner state, are in steady employment, and you even have a good credit score, meaning that you expected to receive the rate advertised. As a result, you may be wondering why this has happened. In this article, we take a look at the main reasons why you may not necessarily end up receiving the rate seen on a brochure or website for a payday loan.

Are credit scores important?

It is easy to make the assumption that if you have an excellent credit score, you will be rewarded by the loan provider in question with the best rates available. After all,  as this score is calculated on the customers’ credit history, a good score indicates a far greater chance that this applicant will be making repayments on time, and therefore pose overall less risk to the lender. If this is the case, then the logical conclusion is that this person will also receive lower interest rates too. In many respects, this is how credit cards work, as your credit score determines the rate you receive, therefore the better your credit rating, the better the interest rate. As those with a poor credit history have a higher risk of defaulting on their payments, you will usually see that they will receive higher interest rates on credit cards and loans.  
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This graph by Bankrate demonstrates how the system works for credit cards when it comes to the interest rate you will receive.

Why it is important to understand the Representative APR

One of the main misunderstandings relates to applicants not understanding the representative APR. In fact, The Consumer Credit EU Directive states that representative APR stated for payday loans and other forms of credit are only applicable to 51% of applicants that are successful. Why is this the case? This ruling is implemented in order to make the approach fairer, as it suggests that lenders should be giving the advertised rate for the loan to just over half of the applicants that they end up funding. Furthermore this means that the lender does not have to provide you with the representative APR if you do not fit into this category, meaning you could pay more.

What is the typical APR?

It is worth noting that the representative APR and the typical APR are two different things. The latter refers to the rate that should be given to at least 66% of all successful applicants. There are different factors that could end up affecting the rate you get (for example, the lender you decide to go with, the duration of your loan as well as your credit score). Sometimes, payday loan lenders get criticised for having a typical APR which appears considerably higher than other types of loans that are available on the market. However, it is important to put this into context. Payday loans, by their very nature, are only intended to help borrowers for a very short amount of time (a few weeks or a month). Therefore APR stated is compounded a number of times making it seems a lot higher than it is.

Affordability checks

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Affordability checks play an important role in determining the rate you will receive.

Another reason why you may not necessarily receive the rate advertised for a payday loan or other kinds of credit may well be to do with additional affordability checks that are in place. These are implemented by the lender in order to verify that it is financially viable for you to pay the loan back without getting into difficulty. This is assessed by looking at the ratio of your existing debt as well as your income. In order for this to be calculated correctly, you may find that you are asked by the lender prior to giving a yes or no to your application for credit to provide your monthly expenses (on credit cards, food, rent or mortgage for example). As a result, it makes sense that if a payday loan lender sees that you have a number of other credit card bills or loan payments to make, you may not end up receiving the lowest rate advertised for the loan you have required, as you present a higher level of risk to the lender

Loyal customers = better rates?

Some loan companies will decide to give existing loyal customers with access to the best rates advertised for a loan. This may be down to a number of different factors (such as perhaps this isn’t the first loan they’ve taken out with them, or they demonstrated their capability time and time again to make repayments promptly). If they have also maintained a good credit score and track record, then that increases their chances of receiving the stated rate for a loan. When it comes to banks, they may show preferential treatment to customers who already have an account with them, and have regularly used it. As a result, you could say loyalty pays – but it may take a certain amount of time for this to pay off for you.

Ask the lender

It is within your right as part of the EU directive to contact your lender and ask them why you received a lower rate than expected, and this can be formally written to you.

Daniel is a loans expert based in London and has been working in the payday loans industry since 2010.