Sarah Jackson, Director at Equiniti Credit Services, discusses how a move to real rate APRs will impact borrowers across the lending spectrum
Let’s talk about representative APRs. Those enticing little percentages that influence a consumer’s decision to apply for one loan product over another. Far too often excitement turns to disappointment when they get down to the fine print and discover that the headline percentage was too good to be true, usually after going through the extensive application process. According to the Financial Conduct Authority*, 51% of people will be accepted at the representative rate or better. That leaves the other half in a take-a-higher-rate-or-leave-it situation. They may also walk away with a hard search on their credit file and a failed application to boot.
Equiniti’s independent research** found that 86% of consumers use price comparison sites to shop around for the best loan product for them. And it’s on these sites where representative APRs determine the position a lender will take on the ‘best buy’ table they present to the borrower. That usually means that ‘super-prime’ lenders appear at the top when, in reality, these products are only available to those with stellar credit ratings. Inevitably, this mis-guide leads to failed applications from consumers who, not unfairly, assume they’re clicking on the best deal for them.
So, the launch of a new price comparison site, realrates.com, which promises to display only the real APR rates that each consumer will ultimately be approved for, should be welcomed as a force for good. And, in the era of open banking, and with similar sites popping up across Europe, we can expect to see the real rates approach become more prevalent across the industry. Where one pioneer goes, others follow.
From a consumer point of view, real rates are a real game changer. Sadly, however, they only change the game for those who already have good credit scores in the first place (and, paradoxically, are therefore the least likely to need it). This is because the technology interface required to access the real rates system is, for now, something that only a select number of prime and super-prime lenders can afford or have the technical ability to integrate with their legacy systems. As a result, smaller lenders – who often cater to the sub-prime market – are either priced or bamboozled out of the equation.
The access cost and systems integration challenge can only be resolved at scale by specialist technology partners. These firms combine the expertise required to do the technical heavy lifting with the market reach needed to pass along real rates access as-a-service to the smaller lenders, via a platform that is priced to be accessible to the whole lending market. Fortunately, these platforms are now starting to emerge, so the market-wide future for real rate technologies is now looking bright again.
After all, the promise of a real rates system can only be fully realised when it is offered by a whole market lending panel, and as a result, is made available to all consumers. All lenders have a specific set of rules and criteria that a potential borrower must meet to secure credit. Good credit rating or bad, an affordability assessment should be at the centre of a lender’s decision, not a representative APR, and certainly not because they can’t, or can’t afford, to implement the technology.
