Lenders play hard to get in the loan lottery

It is harder than ever for certain kinds of borrower to qualify for cheap loans, according to new research. One in six people applying for a loan now won't qualify for the headline rate advertised. Instead they will be offered a more expensive alternative, according to the moneysupermarket.com price comparison website.

As many as 23 per cent of applicants aged 30 to 50 will be rejected in this way, the study claims. The typical loan rate must be offered to at least two-thirds of applicants before it can be used in promotions. This is in line with guidelines set by the Office of Fair Trading.

This risk-based pricing - that is, when your loan rate of interest depends on how credit-worthy you are - allows lenders to offer the best rates to lower-risk customers. But different lenders' methods of calculating the risks can mean that the same customer will qualify at one bank and fail to qualify at another.

Moneysupermarket.com's research reveals that although 25 per cent of all applicants were turned down by their first choice of loan lender, nearly two thirds (61 per cent) of these were able to get credit when they applied elsewhere.

This credit lottery, warns Stuart Glendinning of moneysupermarket.com, can carry a danger with it. Too many failed applications can become expensive as each rejection is noted on credit reference files.

Lenders checking a customer's creditworthiness will note this and could levy a higher interest charge because of the perceived higher risk of lending to that person. "This is a hidden cost that can rise rapidly depending on the number of recently declined applications," says Mr Glendinning.

The tighter levels of loan criteria are down to the higher rates of bad debt write-offs experienced by lenders. In theory, the better your credit rating - held by the three credit reference agencies Equifax, Callcredit and Experian - the better the interest rate on a loan.

However, even if you have never taken out credit you may sometimes run into problems,as lenders can interpret a lack of credit "footprint" as a negative factor and either reject you or charge higher rates.

Today, consumers considering a personal loan must take great care when choosing a lender. To help, moneysupermarket.com has launched smartsearch on its website that will help give you a better idea of which lenders are most likely to accept your application.

And, when you do get accepted, always double-check the loan rate marked on your application form.