Beware: shopping around for a loan could hit your credit score
Consumers could be losing out financially by shopping around for a personal loan product, thanks to “underhand” credit searches conducted by lenders.
Many providers in the personal loan market will only offer borrowers a personalised loan rate quote after they have performed a “hard” credit check. This means they use a credit reference agency, such as Equifax or Experian, to check your financial background before quoting you a loan rate.
But these hard checks leave a mark on your credit file, so by shopping around and getting multiple quotes you could end up with several marks on your file.
The issue with this is that too many checks being conducted in a short space of time can be seen as negative by lenders. This means you could end up being quoted higher rates for simply looking for the best deal.
Research conducted by TSB suggests this could be costing consumers a combined £400 million each year. It says 40% of consumers have no idea of the impact of a credit search on their financial record.
Moneywise asked a range of providers for their policies and found leading brands including the Co-operative Bank, Santander and Tesco Bank perform hard checks before offering customers a final loan rate.
In contrast, Nationwide Building Society and new players such as Ratesetter and Zopa say they only use soft searches – which do not leave a permanent mark on an applicant’s credit file. Nationwide says it has operated in this way since 2011 and was the first lender to conduct soft searches.
Others, such as Halifax and Lloyds Bank, only offer loans to existing customers and use the information they already hold to make a decision on the rate. Metro Bank and Saga Money offer one rate to all borrowers and do not tailor rates based on credit scores. See the table below for our full findings.
Of course, if you take out a loan product this will be detailed as a hard check on your credit file. The issue here is that simply shopping around and asking for a quote could hit your credit score.
Paul Pester, chief executive of TSB, says: “I was genuinely shocked and amazed to discover the underhand tactics employed by loan providers.
“For any market to operate well, consumers have to be able to shop around, understand what they’re buying and be able to switch providers easily. What other industry penalised you for just shopping around to try and get a better deal?”
Gloria Barker, head of loans at Saga Money, adds: “Penalising people for shopping around would not be tolerated in any other industry and it needs to be stopped, conducting a soft credit search, which does not impact someone’s credit score throughout the application process, should be the norm and not the exception.”
How lenders use your credit file to determine a rate quote
See the table below for full details of how loan providers check your financial history when offering you a personalised quote for a loan.
|Provider||Type of search conducted|
|Clydesdale Bank||Hard check|
|First Direct||Hard check|
|Halifax||Only offers loans to existing customers, no credit check conducted|
|HSBC||A quotation is available using a soft search, however a hard check is required for a guaranteed final quote|
|Lloyds Bank||Only offers loans to existing customers, no credit check conducted|
|Metro Bank||Only one rate offered, so no check conducted|
|Saga Money||Only one rate offered, so no check conducted|
|Sainsbury’s Bank||Hard check|
|The AA||Hard check|
|Yorkshire Bank||Hard check|
Source: Moneywise, April 2017. NatWest and Royal Bank of Scotland did not respond in time for publication.
Your credit score is a three-digit number (ranging from a low of 300 to a high of 850) calculated from the information in your credit report. Your credit score enables lenders to determine how much of a credit risk you are. Basically, a low credit score indicates you present a higher risk of defaulting on your debt obligations than someone with a high score. If you have a low credit score, any products you successfully apply for will carry a higher rate of interest commensurate with this risk.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.