Personal loans of the week
While less flexible than credit cards, personal loans allow you to borrow, repaying a set each month for a fixed period of time. Rates are near historic lows, and can be much cheaper than 0% credit card deals for some borrowers.
The interest rate you’ll pay depends on how much you borrow and how creditworthy you are in the eyes of lenders. Typically the cheapest loans are for people borrowing between £5,000 and £15,000, though prices vary from bank to bank (or between building societies, motor manufacturers and peer to peer lenders, which all offer personal loans).
Remember advertised APRs are ‘representative', which means lenders only have to offer the advertised rate to 51% of successful applicants. People with poorer credit scores might be rejected or offered a loan at a higher rate.
Here’s a round-up of the week’s best headline rates.
£2,500 over two years
Metro Bank has the cheapest short-term loan at 5.9% APR representative, but borrowers must be existing customers. Borrowing £2,500 over two years costs £110.69 a month and borrowers will repay £2,656.53 in total.
If you’re not a Metro Bank customer, the best deal comes from Ratesetter. It charges 7.2% APR for a £2,500 loan over two years. Repayments are £112.16 a month, and the overall interest due is £191.80. Hitachi charges no fees if you want to repay the loan early.
£7,500 over three years
Sainsbury’s Bank recently cut its interest rates to a record-low 3.1% APR, but only for borrowers with a Nectar Card. This has since been matched by Swedish lender Ikano, who will offer the same terms to anyone, providing their credit score is strong enough. The Ikano deal is also available on any of its repayment terms, while Sainsbury’s Bank charges a (slightly) higher 3.2% for people who want to repay over more than three years.
On a three-year term 3.1% APR deal will cost £218.44 per month, including £375.75 interest over the life of the deal. Both lenders charge up to 58 days’ interest to settle the loan early.
TSB and Cahoot (a brand of Santander) both lend at 3.2% APR to anyone who meets the credit criteria. Cahoot charges 30 days interest to settle the loan early, while TSB charges 58 days’. That’ll cost £218.77 per month, and £376 in interest over the life of the loan.
£20,000 over five years
Larger loan rates are also tumbling down. Cahoot will charge 3.2% APR representative to people borrowing £20,000 over five years. That’ll cost £361.15 per month and £1,669 over the life of the loan. You’ll be charged 30 days’ interest to settle the loan early.
HSBC charges a slightly higher 3.3% for customers holding a graduate or Premier account. That’ll cost £362.05 per month and a total of £1,722 over the life of the loan. It also has a 30 day interest early settlement charge.
Your credit score is a three-digit number (ranging from a low of 300 to a high of 850) calculated from the information in your credit report. Your credit score enables lenders to determine how much of a credit risk you are. Basically, a low credit score indicates you present a higher risk of defaulting on your debt obligations than someone with a high score. If you have a low credit score, any products you successfully apply for will carry a higher rate of interest commensurate with this risk.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.