Risk Based Pricing Who s Keeping Score
Below is a MRR and PLR article in category Finance -> subcategory Loans.
Risk-Based Pricing: Who's Keeping Score?
Summary
Andrew Hagger, Head of News and Press at moneyfacts.co.uk, discusses the increasing shift of loan providers towards risk-based lending and the urgent need for independent regulation. This regulation should ensure that 66% of consumers accepted for borrowing receive the advertised typical rate.Article
Navigating the world of personal loans and credit cards can be challenging, with varying terms and conditions. Now, consumers must also be aware that they might not qualify for the headline rate that initially caught their attention.
The shift toward risk-based pricing is becoming more common. Recently, major names like Sainsbury's Bank and Egg have moved away from fixed pricing, embracing a model where the rate reflects the borrower's risk level.
While 80% of loan providers already use typical rates, only 35% of card providers have adopted this approach. However, as card companies look to tackle rising bad debts and boost interest income, a broader adoption of risk-based pricing, which better mirrors risk, is likely.
Interestingly, Cahoot stands alone in applying this model to overdraft rates. This approach can be advantageous for some consumers, offering rates as low as 9.8%, which is 2% below the typical rate. However, rates can also reach 14.8%, a level common in current accounts.
According to CCA guidelines, 66% of consumers approved for loans or credit cards should receive the typical rate. Yet, it remains unclear if this rule is being enforced.
If the OFT doesn’t provide clear evidence of regulation, the rules might be exploited, negatively affecting consumers. With the OFT's recent efforts to reduce penalty fees, risk-based pricing might become a covert method to increase profits. Providers could lure consumers with low rates, while over 33% of accepted applicants face much higher charges?"a strategy driven more by profit than risk.
Consumers should understand they may pay a higher rate than advertised, but some might also benefit from lower rates based on their credit score and the provider's criteria.
To determine the rate they'll pay, consumers must first undergo a credit application. This makes the market less transparent for those seeking the best rates.
However, applicants who might have been previously declined by mainstream lenders may now be approved, albeit at higher rates reflecting increased risk. This approach opens up more possibilities for both providers and borrowers.
When regulated to protect consumers, risk-based pricing can be a responsible lending practice. It offers protection for lenders and rewards consumers with good credit histories.
Moneyfacts continues to engage with the OFT to stress the importance of actively monitoring the 66% rule. It's vital for ensuring consumer protection.
Relying solely on complaints and reports from bodies like Trading Standards and Citizens Advice is not enough. A more visible regulatory approach is essential, especially as more providers adopt typical rates.
You can find the original non-AI version of this article here: Risk Based Pricing Who s Keeping Score .
You can browse and read all the articles for free. If you want to use them and get PLR and MRR rights, you need to buy the pack. Learn more about this pack of over 100 000 MRR and PLR articles.