‘Underhand banking costs loan customers up to £400m a year’

Underhand tactics by banks are costing borrowers as much as £400 million a year, according to one of Britain’s biggest banks.

The report by TSB Bank says personal loan customers are being punished for shopping around with the majority of lenders making a hard mark on a borrower’s credit file just for asking for a loan price or quote.

It also accuses rivals of hiding fees and charges and punishing borrowers who pay off their loans early.

Paul Pester, the chief executive of TSB, which split from Lloyds in 2013, said: “I was genuinely shocked and amazed to discover the underhand tactics employed by loans providers. So much so, we just had to blow the lid off this broken market.

“For any market to operate well, consumers have to be able to shop around, understand what they’re buying and be able to switch providers easily. What other industry penalises you just for shopping around to try to get a better deal?

“If you take the time to shop around for a new car it normally pays off and you get a better deal. But if you shop around for a loan to buy that car, you often end up worse off. Your credit rating is hit and it could end up costing you dearly in extra interest.

“We estimate that consumers are losing out by as much as £400 million each year — £400 million which is going straight into the pockets of aggressive loans providers. Enough is enough: it’s time the industry comes clean on these costly underhand tactics.”

TSB’s research found that nearly two thirds of banks, including Santander and Tesco, perform hard credit checks before giving customers an accurate quote.

A minority of lenders, including Nationwide, HSBC and TSB, conduct “soft” searches that do not leave a permanent mark on a credit file.

It said that applying for multiple loans to obtain quotes raised the average interest rate paid by 1.75 percentage points. This equates to an extra £364 in interest on a £10,000 loan taken out over four years. The bank estimates this is affecting one million customers a year.

The TSB report is unusual because most banks are normally reluctant to criticise their rivals, with a code of silence operating across the industry. TSB appears to be breaking that unwritten rule in an effort to snatch market share three years after it split from Lloyds.

The bank is calling for a number of changes including that rival lenders become more open about their fees and charges. Some lenders, for example, charge interest or penalties when a borrower makes an overpayment or caps the amount that can be overpaid each year with the details only in the small print.

It also wants banks to be made to publish the number of applicants who receive the advertised “typical” interest rate on a loan.

Tesco Bank said it used hard searches because it wanted to give customers certainty over the rate.

A spokesman for Santander said: “We currently do not use soft searches but we continually monitor our policies to ensure we are in line with the market and make changes where we can.”

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