How To Look For A Personal Loan
With the Bank of England base rate rapidly zooming towards zero, it would be easy to assume that the cost of borrowing on credit cards and loans should be coming down, too. The bank rate now stands at an historic low of 1.5%, and looks set to drop even further when the Monetary Policy Committee (MPC) meets again this week.
However, credit card companies and loan providers don’t seem to have taken their lead from the MPC’s decisions. Indeed, while the base rate has fallen, personal loan rates in particular have increased.
According to research from Moneyfacts, the amount of interest charged on some personal loans has shot up by 3% over the past 18 months. In June 2007, the typical rate charged for an unsecured loan of £5,000 was 8.6%; now, this stands at a far more forbidding average of 12%.
Beating the rate rises
The reasons behind these personal loan rate rises are nothing new. The credit crunch has caused lenders to tighten their purse strings considerably since it first struck in 2007 – and this means banks are less keen to lend at low rates, as well as choosier about who they accept for credit.
In turn, we need to be particular about where we look when we need a loan. Finding the best deal on borrowing is arguably more complicated than it’s ever been, so shopping around is crucial if you’re to avoid paying over the odds.
The credit card option
Using a 0% or long-term, low-rate balance transfer deal is often the smartest way to make existing debts cheaper. (You can read more about this in my article, Recession-Busting Balance Transfers.)
However, applying for a market-leading balance transfer offer can be risky if your credit rating isn’t strong. Credit card companies are now very cautious about who they accept for top deals – and it’s unwise to apply for one you’re worried you won’t get.
Being rejected for the credit you need is bad enough, but it will also leave a ‘footprint’ on your credit file. This could make it harder for you to borrow money elsewhere, putting you in a worse position than before.
A look at personal loans
Opting for a personal loan is unlikely to be the very cheapest way for many people to borrow. Nevertheless, it can still make good financial sense to pay off old, expensive debts with an affordable personal loan.
Most credit cards’ standard interest rates top 16.5%, while some store cards charge as much as 30% on outstanding balances. Thus, shifting costly borrowing from products like these to a lower-rate loan could save you a significant sum during the lifetime of your debt.
Just as credit card companies have recently reigned in their lending, loan providers now set tougher criteria for customers. This means all but the most credit-worthy borrowers will find it difficult to get their top rates.
Therefore, it’s a good idea to check your credit rating before deciding which loan to go for. Once you have an idea of how favourably lenders are likely to look upon you, you should be able to choose a loan at a suitable rate.
My top picks
The tables below show a selection of market-leading loan rates from a variety of providers. I’ve looked at loans of £5,000 over three years and £10,000 over five years.
£5,000 over three years:
| Lender | APR (Typical) | T.A.R. (Total Amount Repayable) |
| YourPersonalLoan.co.uk* | 7.8% | £5,601.96 |
| Abbey | 8.9% | £5,686.92 |
| Alliance & Leicester | 8.9% | £5,689.80 |
| Barclays | 9.9% | £5,767.92 |
*This loan is not a secured loan, but is for homeowners only.
£10k over 5 years:
| Lender | APR (Typical) | T.A.R. (Total Amount Repayable) |
| Nationwide | 7.9% | £12058.80 |
| Alliance & Leicester | 8% | £12,096.60 |
| Barclays** | 9.9% | £12,607.80 |
The lower rates shown in the table are a good choice for people with very good credit histories. However, anyone with a weaker credit score should approach these with caution.
Lenders tend to offer rates in line with how risky they perceive a customer to be – and it’s important to remember that for a lender to advertise an APR as ‘typical’, it has to award that rate to just two-thirds of applicants. The remaining 33% will be offered a worse deal.
It’s impossible to guarantee that anyone will get the financial products they apply for. However, targeting your loan application thoughtfully is one way to help improve your chances of getting the one you want.
A word of warning on consolidation
Applying for a personal loan to re-structure existing debts can make them cheaper and simpler to pay off – but it’s crucial to ensure you aren’t consolidating debts for the sake of it.
Rolling up all your borrowing into one place can be tempting, but make sure that you only include debts that will be made cheaper by the process. If you have a cheap balance transfer credit card, for example, it could make sense not to include any outstanding balance in your grand re-structuring plan; consolidating it could mean you actually increase the interest rate being charged on the debt, which will ultimately make it more costly to repay.
Finally, ensure you only borrow what you need – and once you’ve shifted old debts to a sensible place, properly cancel the credit cards and store cards you’ve cleared. This could have a beneficial effect on your credit rating, and will prevent you from running up expensive debts on them again.
**This material is for information purposes only and should not be considered financial advice. We strongly encourage our readers not to rely solely on this content, but to seek independent advice when making financial decisions.**
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