Application loan personal uk

Risk pricing means low rates for good borrowers and high ones for bad.

In terms of personal banking, the Bible got it just about right: "Unto every one that bath shall be given... But from him that hath not shall be taken away even that which he hath." Whack a [pound]100,000 bonus into a savings account, and expect to get a higher rate of interest than a pensioner who scrapes together a few pounds. Fall behind on your loan repayments, and wait for your house to be repossessed.

Nobody should have been surprised when Barclays Bank announced recently that it was about to charge customers who could least afford a loan its highest rate of interest. Not that Barclays put it quite this way in the press release.

Rapidly backtracking on an unguarded comment that one of its officials made to the Financial Times, the bank issued a statement saying that it was simply piloting a scheme that would offer cut-price loans to its best customers. It claimed that such "discounts" would be irrespective of a customer's income or debts, and would be assessed "on an individual basis".

But, however much Barclays wriggled, it could not get away from the reality that it was moving towards some form of "risk-based pricing" for banking services. This bit of jargon means that loan interest rates are set for each borrower according to the risk of default or late payment: the higher the risk, the more expensive the loan.

The lenders prefer to say that the lower the risk, the higher the "reward", adding weight to the adage that a banker is a man who lends you an umbrella when the weather is fair and takes it away from you when it starts to rain.

In practice, information about each customer is put through an automated credit-scoring system, often involving data from credit reference agencies, which hold files on most people's credit records. The system calculates the perceived risk and sets an interest rate for each individual applicant. In some cases, the application for credit is turned down completely -- and the fine details are always kept secret from the customer.

Politically, this is a highly controversial area. Consumer groups and debt counsellors argue that risk-based pricing is an underhand way of cherry-picking the best customers, further separating the haves from the have-nots. Price the riskiest customers out of the market, and the problem of financial exclusion gets much worse.

Like most financial services marketing ideas, risk-based pricing emanates from the United States. It is, therefore, perhaps predictable that one of the pioneers of the system in Britain is American Express. The company's UK head of personal financial services, Chris Herbert, staunchly defends the approach.

Herbert argues that most lenders already apply credit scoring, but use it as a blunt instrument: a customer either qualifies for a loan, paying an across-the-board rate, or is rejected entirely. He says that by introducing differential rates (in Amex's case, between 7.8 per cent and 14.9 per cent), the company can cast the net wider, lending to people who might previously have been rejected.

One banker, who preferred not to be named, admitted that his organisation was holding back because the issue was so contentious. "If you count yourself as a business, rather than a charity, then obviously risk pricing is the way forward because cross-subsidisation is significantly reduced. You are looking at customer behaviour and rewarding appropriately. Newer entrants, such as internet banks, will get less flak because they are in a self-selecting niche market."

Abbey National's internet bank, Cahoot, falls into this latter category. And the bank is quite overt in its on-screen message: "At Cahoot, we think it is high time you were rewarded for the way you run your accounts. So the better your credit rating, the lower APR you pay."

This means that Cahoot customers currently pay somewhere between 7 per cent and 11 per cent for a personal loan. However, the bank accepts that its target market is people with a good creditrating. Its initial rejection of potential customers is, therefore, probably higher than average. Thus Cahoot is not a good example of risk-based pricing casting the net wider.

But the practice is likely to spread. Among the big four, the bets are on that Barclays will extend its pilot scheme, and HSBC is widely tipped to follow suit.

However, if loan interest rates do become generally risk-based, the Office of Fair Trading may well need to investigate to ensure that consumers are being given all the information they need to compare different loan products properly. If the rate you are going to be charged can be found out only after a time-consuming and complicated risk profile, this hardly fosters a competitive market place.

Roger Anderson writes the "Questions of Cash" column for the Sunday Times