The research by Shawbrook Bank, produced by the Centre for Economics and Business Research (CEBR), found teaser or ‘representative’ APRs are increasingly unrepresentative of actual interest rates offered to successful loan applicants.

It found the average APR paid by a borrower for a fixed rate personal loan of £9,000 was 7.3% but the advertised representative rates from the UK’s 13 leading lenders ranged from 2.8% to 4.9% – a difference of 2.4%.

Teaser APRs are widely used across the personal loan market and the vast majority of loan applicants (4 in 5 or 83%) expect to get the advertised representative rates. But current EU rules dictate just over half (51%) are actually required to be offered the headline figure.

With the unsecured lending sector reaching £209bn in February 2018, Shawbrook estimates borrowers are paying £204m a year more than expected in servicing their loans.

The report said this leads to consumers feeling misled and dissatisfied with the way representative APRs are used to market personal loans. It can also have a negative effect on a borrower’s ability to make an informed decision as to whether they can afford a loan from the outset and can increase the chance of people defaulting on their loans.

Since Q1 2016 lenders have recorded an increase in default rates on unsecured consumer loans in eight of the last nine quarters meaning that accurate information from the outset of a loan application is more important to borrowers than ever before.

‘Unrepresentative of reality’

Paul Went, product and markets director at Shawbrook Bank, says: “So-called representative rates are actually unrepresentative of reality for too many borrowers and it has a negative effect on everyone. The growing scale and significance of the personal loans market means that it’s more important than ever to ensure loan applications are as transparent as possible for people. A widening gap between expectation and reality when it comes to loans is bad for all concerned.

“The research shows many consumers feel the marketing of loans is at best confusing, and at worst misleading. We believe that’s the wrong way to do things and two thirds of the prospective borrowers we spoke to strongly support that view. As a result, we are making a clear commitment to how we advertise and market our personal loans, and hope that this will lead other lenders to consider the approach they take.”