Consumers in the dark about new credit directive

With the Consumer Credit Directive looking to shake up the lending market, new research from uSwitch.com, the independent price comparison and switching service, reveals that initially it could cause more harm than good, leaving consumers confused and potentially put off applying for credit. Despite the changes coming into effect in less than two weeks, 55% of consumers aren't aware of the new EU regulations and just 12% understand what it will mean for them.

A key part of the directive is to make credit providers display an APR that 51% of its customers are offered. This means that although advertising won't be personal to consumers, it will be a fairer representation of the rate they are likely to get. However, the research shows that just a quarter of consumers (25%) understand the new representative APR, with the majority (32%) believing it is a reflection of their outstanding balance.

The move to display a representative APR is expected to lead to higher advertised rates. This transparency which may help the 16% who have pulled out of an application for a finance product after getting offered a higher rate than what was advertised. However, with one in five (18%) choosing their credit card and over a third (37%) choosing their loan based on the low interest rate advertised, the new directive could see the number of applications fall, until consumers get used to the new advertising. The change to a representative APR will put off nearly 13 million consumers (43%) who would look for a lower rate if the new advertised APR was much higher. 

The research also shows that although just 2% think the current rules on advertising for APRs are fine, one in ten (10%) disagree with the new initiative - half of these think it is too confusing. And 17% think the new rate would be misleading as they may be in the 49% not represented by the rate.

However, one third (32%) said a higher advertised rate wouldn't put them off applying as it would give them a more realistic idea of what they would be paying. Nearly 80% think that the rate they see advertised will be the rate they're offered, and the directive will make it more likely that this is the case. The increased transparency the directive will hopefully bring should prevent multiple applications, which can have a negative effect on consumer credit ratings. Over three quarters think the new system is a good idea, but more needs to be done, especially on the transparency of rates.

The directive aims to empower consumers, but they can also help themselves by taking simple steps such as checking their credit rating, which can help customers choose the most suitable product to apply for, based on their personal situation. However, over two thirds (67%) have no idea what their credit rating is, and 44% have never checked it. Less than one in ten (9%) check it regularly.

Stefan Maryniak, personal finance expert at uSwitch.com, says:

"The Consumer Credit Directive is about providing consumers with a level playing field - unfortunately for borrowers it looks likes a bumpy ride at least until the changes have bedded in and the market and consumers have adjusted. It is a step in the right direction towards navigating consumers through the opaque lending market, all be it a cautious and tentative one.

"By forcing suppliers to give greater prominence to the facts in any advertising, the directive should bring greater transparency to the personal finance market. It will also encourage responsible lending from the banks and give consumers more power to get out of a contract, with a prolonged cooling off period, and an easier way of opting out during this time.

"However, the majority of consumers are unaware of the directive or don't understand what it will mean to them, which means many may be left confused if the APRs rise quickly by the end of February. But overall the move is to be welcomed. It should mean consumers are less likely to fall for incentives, ignore the important fees associated with credit and make multiple applications because the advertised rate is different to the one they are offered.

"However, the directive won't solve every problem and we urge consumers to take this as a wake-up call to start taking control of their financial situation. One very simple but important step they should take is to find out their credit rating, which can be a big help when looking at financial products. It is something that consumers can do to gain clarity in a confusing credit world, and uSwitch.com currently offers a one month free trial with Experian, for consumers looking to brush up on their finances."