Risk based pricing for Co-op Bank personal loans

The Co-operative Bank has announced that, from this week on, it will be implementing personal loan pricing that better reflects the creditworthiness of the loan applicant.

Different interest rates will be offered to different applicants based on their creditworthiness – which is assessed through factors like a consumer’s credit bureau score, adverse credit history, employment status and income.

The rates on offer will range from 9.5% for an A+ credit score to 19.5% for a D score, but it is likely that a rate of 13.95% will apply to the majority of applicants.

However, discounts are available for main bank customers (-1%) and for those with particular insurance policies (0.50%).

This risk-based approach is a first for a New Zealand bank as they have long had fixed carded rates for this type of lending with the only distinction being whether the lending was secured or unsecured.

But finance companies and peer-to-peer lenders often employ a risk-based approach to their rates.

A Co-operative Bank spokesperson said the move was prompted by the bank’s desire to take a genuinely personalised and transparent approach when assessing their customers’ borrowing needs.

“We were finding that often personal loan rates were higher than they needed to be and so not as competitive for people who are good customers. Instead we wanted to offer them fairer rates.”

To this end, they can now offer their best customers interest rates as low as 8.5%, the spokesperson said.

“For many people this will make a personal loan an attractive alternative to topping up a mortgage where the total cost of interest may be higher - based on taking longer to repay the debt when added to their existing mortgage balance.”

While the risk-based approach is of obvious benefit to those with good credit scores, the situation is slightly more complicated for those with not-so-good scores.

The bank will offer two higher rates (18.5% – 19.5%) for higher risk applicants who might have some debt management issues. 

The Co-operative Bank spokesperson said they rejected the idea that someone who had challenges managing their finance should be cut out of a loan completely or charged exorbitantly high rates for it.

“Pricing for risk can only go so far and we have stayed true to our core values by not joining other lenders who charge interest rates of 25% and over.

“We are looking for opportunities to assist those that can easily be exploited by lenders who do not share our values.”

However, he said the bank will be sensitive in how they promote the higher rates as well as how they deal with any applications from those with lower credit scores.

“Our approach will be that every application in this category will be referred to one of our lenders, so we can conduct a personalised assessment, rather than being looked at by a machine.”