| At the moment, prospective borrowers from right across the job spectrum, from stockbrokers to sales assistants could apply for a personal loan and be charged the same interest rates from the Nationwide.
However, Nationwide has announced they are introducing a risk based system where prospective borrowers on lower incomes will be charged higher interest rates, whilst those earning higher salaries will pay lower rates
Historically, lenders have based in the interest rates they charge on the amount being borrowed rather than on the credit history of the applicant. These changes mean that anyone with a less than perfect credit history, pensioners on fixed incomes or those in lower paid jobs could face interest rates of up to 19.9 per cent.
Nationwide say that other finance companies are already using these techniques for lending services such as store and credit cards and personal loans. It does mean, however, that many people with lower incomes will find it hard to for example, buy a new (or second hand) car, or fund home improvements, because it will be more difficult to negotiate a loan and the interest rates for successful applicants may well push the monthly payments out of reach.
Nationwide says these changes will help to protect them against borrowers who default on loans, either because they are unable or simply unwilling to repay debts
. Director of Finance for Nationwide Jeremy Wood defended the company’s move:
“As a prudent lender in the current credit environment it is important that, in pricing personal loans, we are placing a greater emphasis on risk and lending appropriately”
Under the proposed new schemes, a high earning applicant would be charged interest of 15.9 per cent on a loan of between 1000 and 3000 pounds. A lower earner, or someone with a poorer credit rating would be charged 19.9 per cent to borrow the same amount.
On a loan of 5000 to 7500 pounds the difference in interest rates is even more pronounced - 8.9 per cent for the high earner, and 16.9 per cent for the lower earner.
With the Bank of England base rate at an amazing rate of around 1 per cent, the interest rates even for the higher earner could be considered to be high
.Moneynet website spokesman Andrew Hagger comments “the net effect is that the people who can least afford it end up paying more”
In the current economic downturn, the introduction of such risk based interest charging policies would seem to be at complete odds with calls from MP’s and the Government as well as other financial institutions that are calling for Lenders and Banks to treat their customers fairly. Ministers are looking at plans to police the banking industry with a new legally enforceable code, which the Financial Services Authority would monitor.
Very many people are feeling very anxious about this, and rightly so.We await the outcome.
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