Oakam Loans, which provides loans for three to six months and offers an APR of 676.6%, markets its services as a way to boost a potential borrower’s credit profile.
The lender’s website (pictured) depicts a customer with a map in her hand and asks: “Recently moved to the UK? Build your credit history.” Another image, now replaced by a Christmas-themed advert, depicted one customer saying: “I need to build my credit history.”
However, lender attitudes to high-interest, short-term lenders such as Oakam suggest this promise can’t be guaranteed.
Oakam Loans shares data with one credit agency, Callcredit. An Oakam spokeswoman said the firm helped customers access credit who would otherwise not have the opportunity.
She said: “As Oakam shares data with Callcredit, the repayment of an Oakam loan will consequently build a UK credit history.”
Callcredit refused to comment on or substantiate Oakam’s claims. However, a spokesman said it was difficult to generalise about the impact of short-term high-interest loans on an individual’s credit rating.
He said lenders view the loans in different ways: “Some may view a short-term loan as having a detrimental impact on some consumers’ creditworthiness.”
Equifax external affairs director Neil Munro said a straw poll of lenders would probably suggest they saw a history of short-term high-interest loans as a negative on a credit history.
He said some mainstream lenders took the view these types of loans indicated a borrower was in finanncial crisis: “This may therefore mean the loans are not helping or they are not being looked at in a positive way by lenders and then not necessarily helping people build their credit history.”
Until short-term high-interest lenders shared data with all credit bureaux, it was hard for mainstream lenders to see a like-for-like picture, he added.
An Experian spokeswoman said repaying a short-term high-interest loan on time and in full should strengthen a borrower’s credit history.
However, she continued: “Some lenders might see the fact that you’ve taken out a short-term loan as a sign your finances are under pressure.”
Kensington Mortgages has confirmed it will turn down applications by borrowers who have recently taken out short-term high-interest loans. Other lenders say they decide on a case-by-case basis.
The incoming Mortgage Market Review will make clarity over the credit-building quality of these loans even more important.
Personal Touch head of lending Neil Hoare said adviser feedback suggested clients who had taken out short-term high-interest loans are proving difficult to place.
He said: “The spending habits of the applicant are coming under greater scrutiny as lenders become more behavioural based in their affordability models in preparation for the MMR in April 2014.
“Responsible lending goes hand-in-hand with responsible borrowing and that means clients managing their budgets.”
Your Mortgage Decisions director Dominik Lipnicki said: “We are aware if a client has a lot of short-term high-interest loans on their profile it shows the lender they are either out of control of their finances or almost out of control.
“The lender you are talking about, their APR is 676.6%. You don’t go to a lender like that if you don’t have issues.
“If you have never borrowed any debt and you repay it, the loan will improve your credit rating. But if you have a credit history and you go to something like that it looks like you are out of control.”
He described the adverts as “irresponsible” and questioned why such loans would be more helpful to borrowers than a credit card or an unsecured loan from a high street bank: “There are better ways of repairing your credit.”
An Oakam Loans spokeswoman said: “Oakam helps those customers access credit who do not have the opportunity to take out a credit card or an unsecured loan from a high street bank and who may have been refused by mainstream lenders before.
“We provide a valuable service to these customers and as a responsible lender we point out options like an overdraft or unsecured loan from a high street bank with existing customers when we think that their credit score would be considered.”
These customers included those who had recently moved to the UK and lacked a credit history as well as those who had damaged their credit history in the past, she said.
