Beware Sainsbury's loan rate 'guarantee'

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Sainsbury's have recently joined Barclays and started offering a 'price promise guarantee' on their personal loans.

The price promise from Sainsbury's guarantees to beat other lenders who offer a lower APR rate on a like for like loan.

So, if a new Sainsbury's loan customer gets accepted for a subsequent loan within 28 days, and the rate is cheaper, Sainsbury's will beat the cheaper rate by 0.1% APR.

Yet - even in our current fluid market, where loan rates often fall - there are few reports of individuals actually making use of these 'guarantee' deals.

Why is that?

A simple reason

APRs are calculated and loans are generally lent based on risk and the individual circumstances of each customer.

The outcome of this is Sainsbury's customers will have to apply and be accepted with another loan lender in order to ascertain - and obtain proof - that they could get a cheaper rate elsewhere.

Not only then will the customer have to keep on researching loan rates after having found one, an unlikely proposition for most, they'll also have to be accepted for multiple loans from different providers, which creates implications on credit searches.

Let's take a closer look at those implications, as well as the other loopholes in Sainsbury's price match guarantee to be aware of.

Issues of price matching loan rates

While it may say something of the confidence of lenders that they can offer such guarantees, there are barriers, and even dangers, for consumers looking to take advantage of them.

Closer inspection certainly reveals a few points that make those guarantees ring a little more hollow.

Credit searches

Credit searches made during the application stages for a loan leave a footprint on credit reports, informing all subsequent lenders of the applicant's history.

That footprint contains information on when you applied for credit, who you applied with and what type of credit you applied for.

Whilst it doesn't say whether that application was successful or not, lenders may thereafter view multiple loan applications as a sign of insecure or unstable credit.

So with a 'footprint' on your credit report - like the one Sainsbury's left no less than 28 days ago when you successfully applied for their loan - you're more likely to be offered a higher interest rate or have future loan applications refused altogether.

Shopping around several loan providers compounds the problem even further.

Quotation searches

There is, seemingly, a simple way around this problem: quotation searches, which unlike full application searches, don't leave a footprint on your credit report.

Unfortunately, very few lenders offer quotation searches, and, in any case, a quotation search isn't enough to stir the Sainsbury's guarantee into action.

The terms and conditions specifically state that "you must provide us with a written offer from the other lender... In most cases a photocopy of the loan agreement will suffice but we may ask you to provide the original agreement". Getting an agreement means making a full application and undergoing a full credit check.

All in all, credit searches tend to render loan rate guarantees largely hollow: getting the first loan makes it difficult to get a second at a lower rate.

Then, of course, there's the small print.

Small print: 'like for like'

It's also worth paying attention to a couple of pieces of small print that appear in the Sainsbury's guarantee and often in similar ones too.

The first is the term 'like for like'.

Sainsbury's want to ensure that you're making a fair comparison between their loan and a loan with a lower rate.

Whilst this is fair enough, there are lots of examples where this is understandable, secured loan APRs are generally lower than unsecured loan APRs for example and the two aren't competing on a level playing field.

Fair or understandable doesn't always equate to useful for the holder of the loan, though.

Imagine, for example, that you take out a loan for £3,000 repaid over two years but later realised you could have borrowed much more cheaply with a purchases credit card offering 0% for two years.

It would be annoying but there would be little you could do about it.

Imagine, similarly, that you take out a loan for £9,000 repaid over three years but later realise that you would of actually paid less with a £10,000 loan repaid over the same period (because of the way the market works, this is not all that uncommon).

Again, that's not like for like and the price match guarantee therefore wouldn't apply.

Small print: 'like for like' take two

Another bit of the like for like small print we like says this, in the Sainsbury's version: the guarantee is not available to "[loan] discount rates offered only to members of groups or individuals who meet previously specified criteria".

In English then, that means loans offered by providers to their existing customers. In other words, it's likely a loan from a provider you're already a customer of wouldn't be accepted under the price match guarantee.

Again, you can see how this makes sense from Sainsbury's point of view.

But you can also see that it's yet another hole in the 'guarantee' of their interest rates and, from a consumer perspective, just plain unhelpful.

In fact, it could almost be seen as a little bit of an admission that consumers may be more likely to get cheaper rates from their existing bank.

All in all, while loan rate guarantees such as those offered by Sainsbury's and Barclays speak of the confidence of lenders who offer them, these are big institutions offering some of the lowest loan rates, consumers are still far better off shopping around for the best loans before making an application.