Higher Rates on Personal Loans for the Less Well Off By Sheila Challiner At Isnare.com Ezine Articles

Anyone who may fall into the lower income bracket and those with a poor credit record are going to have to pay higher interest rates, up to 19.9%, to enable them to borrow money for a personal loan.

It seems very unfair but it has recently emerged that the Nationwide Building Society, the largest in the UK, are basing their interest rates on the assessed risk of the individual client. Up until now, the system that has been used across the board within the industry has been very straight forward and rates have been based on the amount of the loan, not on the credit history of the borrower.

At Nationwide, as with many other lenders, the street cleaner or the lawyer, will not pay the same basic rate for a loan as before, but, the person with the smallest income will pay the highest rates and the higher earner who is likely to be financially secure will get their loan at a lower rate.

This trend has been implemented throughout many of the finance companies long before now, say Nationwide, and they are merely ‘jumping on the band wagon’.

At the end of the day, the final outcome is that those on lower incomes in our society will find borrowing much more expensive and harder to achieve – for some this could make it impossible to make a major purchase and for many, even harder to make ends meet.

In such troubled economic times the Nationwide say that they have to be cautious and cannot risk their finances against people who simply do not, or are not trusted to pay their debts. It is a time of major instability in the housing market with an increase in people losing their homes and also many becoming bankrupt.

Using the system of risk-assessed lending a well-off or low-risk person wanting to borrow 1,000 to 3,000 pounds would be charged at a rate of 15.9%, whereas the less well-off, high-risk customer would have to pay interest at a rate of 19.9% - quite a difference and in the cold light of day, compared to the Bank of England’s 2% base rate, 15.9% is plenty high enough.

As the amount borrowed increases, say to 5,000 to 7,500 pounds, the interest rate for the low-risk customer with a good credit history drops dramatically to 8.9%, but, for the high-risk borrower it only drops by 3% to 16.9%

Jeremy Wood, Nationwide's director of Consumer Finance, justified their move by saying: '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.'

From the Moneynet website, Andrew Hagger, a personal finance expert said: 'The net effect is that the people who can least afford it end up paying more.'

The decision by Nationwide to follow suit behind other big financial companies has proved to be extremely controversial and very much on a tangent from the requests of other banks, Members of Parliament and the Government to be fair in their treatment of customers.

Plans have been revealed by Ministers to bring in a strict code of regulations for banks which will be regulated by the Financial Services Authority and legally enforced.

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