How to find a first-rate personal loan
As costs soar a little research can still secure a good deal
Laura Whateley From The Times May 23, 2009
Anyone tempted into buying a new car by the launch this week of the Government’s scrappage scheme may be in for a surprise when they try to arrange finance for their purchase.
Despite the Bank of England base rate hovering at a record low, the cost of unsecured personal loans has jumped by up to 44 per cent in the past two years, with the average rate on a £5,000 loan rising from 8.6 per cent in May 2007, to 12.4 per cent this month, according to Moneyfacts. co.uk, the financial website.
Michelle Slade, an analyst at Moneyfacts, explains that “rising unemployment has led to a rise in the number of customers defaulting on unsecured loans and this increased risk is being seen in higher rates”.
She adds: “If a customer is struggling to meet repayments, unsecured lending is likely to be the first on which customers default.”
For borrowers with poor credit scores, the situation could be even worse, as advertised rates can distort the real cost of personal loans. Ms Slade says: “With many providers showing just typical rates, the actual increase a customer has to pay today compared with a few years ago could be much higher. Tighter lending criteria is likely to mean only those with a perfect credit history will be getting the best rates.”
In the past year alone, 19 personal loans have been withdrawn from the market. With fewer options available, Times Money explains how to find a good deal.
In order to take advantage of the best-buy interest rates the first thing to do is to check for any black marks on your credit score. You can get hold of a copy of your profile for as little as £2 from agencies such as Experian or Equifax. Some lenders offer customers personal pricing and will give you an individual interest rate based on its assessment of your financial circumstances and credit history.
Others will simply turn you down for their best rates if your credit history is not up to scratch. For example, yourpersonalloan.co.uk offers a blanket 8 per cent APR to all customers, but will reject your application if you do not meet its lending criteria.
Monthly repayments vary depending on how quickly you can pay back your loan, and also the amount you borrow. The general rule is that the larger the loan, the smaller the monthly interest rate.
£10,000 over five years
The current best buys for those who wish to borrow £10,000 over five years include a personal loan from the AA, which offers a typical APR of 8 per cent with monthly repayments of £204.26.
Asda has a typical rate of 8.2 per cent with monthly repayments of £205, and Alliance & Leicester has a loan with an APR of 8.9 per cent, making monthly repayments £205.44. None of these best-buy loans charges administration or arrangement fees, although you will have to find 30 days of interest if you wish to repay the Alliance & Leicester loan early.
Also, bear in mind that the shorter the term of your loan, the less it will cost you. For example, if you borrowed £5,000 over five years on a loan at 7.9 per cent your monthly repayments would be £101.14 and you would end up paying back £6,068.57. But if you cut the loan term to three years your monthly payments would be £156.45 — repaying a total of £5,632.25. That is a saving of more than £400 over the lifetime of the loan.
£5,000 over three years
The best-buy loan of £5,000 over three years is from Sainsbury’s Finance. However, you must be a Nectar card customer to receive its APR of 7.9 per cent. At this rate, monthly repayments would be £155.93, and there are no arrangement or application fees. You can repay your loan in full at any time during the repayment period — between one and seven years — without charge.
Yourpersonalloan.co.uk offers an APR of 8 per cent with monthly repayments of £156.04 a month, a total of £5,617.39 over the full term of the loan.
Tesco Personal Finance also offers a typical APR of 8 per cent with monthly repayments of £156.09, with £5,619 payable overall. However, Tesco will charge up to two months’ interest if you decide to settle your loan early.
Career development loans
Graduates and non-graduates taking further vocational training or studies for career development can apply for specific loans, available from a small clutch of lenders. The loan is interest free for the duration of the borrower’s course with repayments deferred until after graduation.
The best-buy career development loan is from Barclays, which offers an APR of 12.9 per cent on a loan from £300 up to a maximum of £8,000. Repayments can be deferred for up to two months once the course is finished. The Co-operative Bank also offers an APR of 12.9 per cent to fund a vocational course that lasts up to two years. Repayments can be deferred for up to a month once the course is completed.
Secured loans
If you are rejected for an unsecured loan because your credit rating is particularly poor, or you wish to borrow more than £25,000, you could consider borrowing money against your property in the form of a secured loan.
However, your choice will be somewhat limited. Since mid-2007 14 lenders have withdrawn from the market. Ms Slade says: “Many lenders have found it is no longer a viable option to offer secured loans in the current economic climate and we have to wonder for how long the remaining lenders will be able to survive.”
Of the remaining lenders, Nemo has the best rate, with a typical APR of 9.6 per cent on a loan of between £25,000 and £75,000 over a period of between 5 and 25 years. Borrowers should be aware, however, that secured-loan rates are variable, and that interest payments could be raised while you are still in debt to the provider.
Protection shake-up
From next Friday lenders will no longer be able to sell single premium payment protection insurance (PPI) where the cost of cover is paid up front and added to the cost of a loan.
The Competition Commission imposed the ban after the Financial Services Authority (FSA) accused lenders of mis-selling the product, designed to cover loan and credit card repayments if borrowers are unable to work due to an accident, sickness or unemployment.
From 2010 lenders will also be prevented from selling PPI to their own customers within seven days of a personal loan being taken out.
Peter Davis, the commission’s inquiry chairman, says the measure will give consumers “the time and ability to make an informed choice and other providers the chance to compete far more effectively with the initial credit provider.”
For more on PPI and to compare the best deals to protect your loan, visit the FSA’s website: moneymadeclear.fsa.gov.uk.
This news printed in http://www.timesonline.co.uk/
