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Article updated: 18/01/13

Risk based pricing & representative APR explained

During the past decade there has been an increasing trend by personal loan providers towards what is known as risk based pricing.

Most loan providers no longer offer the same standard interest rate to all applicants, instead the interest rate charged on loans will be dependent on the applicants personal circumstances, previous credit history and ability to repay. Borrowers with a record of bad debts or with no credit history at all can expect to pay far higher rates.

When lenders advertise their loans, they promote a "representative" APR. By EU law this rate has to be offered to at least 51% of successful applicants, meaning that many people (49%) could be offered a higher or lower rate to the one advertised.

For instance one particular company is currently offering a typical APR of 13.8%, but discloses in smaller print that rates range from 8.9% to 24.9% APR.

Many lenders will also charge lower interest rates for consumers who borrow larger sums. In some cases, customers may be tempted to borrow more than they intended in order to get a lower rate.

Risk based pricing can make it confusing for people shopping around for the best rates. Some lenders manipulate their rates so they appear competitive in comparison tables.

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