EU rules may push up loan rates

New European rules mean that financial institutions will soon be able to charge consumers higher-than-advertised interest rates on loan and credit card deals.

At present lenders can only advertise rates they expect some 66% of borrowers to meet. The new rules, set to come into effect from February 1, will reduce that figure to 51%.

Many borrowers could be affected by the changes, part of the European Consumer Credit Directive, as increasing numbers of banks and building societies have begun using so-called risk-based pricing, a system which determines the rate being charged on the applicant's credit history.

However, there is also some good news for consumers, as the directive states that lenders who reject borrowers' applications must tell them why, and if it is because of a problem with their credit rating, they must tell them which credit reference agency was used and how the consumer can get in touch with it.

Lenders will also have to provide borrowers with standard European consumer credit information, or a Secci, giving detailed information on the product being taken out, before people sign a deal.

They will also have to carry out more stringent affordability checks, with the emphasis being on whether the consumer can afford the product throughout its term, rather than looking at whether they pose a risk of defaulting on the debt.

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