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 6.9% APR for a £2,500 loan over two years. Repayments are £111.82 a month, and the overall interest due is £183.64, plus the original £2,500 loan. Ratesetter charges no penalty if you want to settle the loan early, while Metro Bank charges up to 1% of the outstanding loan.
£7,500 over three years
Ikano Bank will lend at 3% APR over any repayment term, while Sainsbury’s Bank will charge 3.1% APR if you have a Nectar card and choose to a repayment period that’s no longer than three years. This’ll cost £218.44 per month. Over the course of the loan borrowers will repay £7,864, including £364 interest. The rate is subject to your credit score and some borrowers will be charged more.
Both lenders charge up to 58 days’ interest to settle the loan early.
£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.
Next cheapest is Halifax, charging a marginally higher rate of 3.3% APR. It will cost £362.05 per month and a total of £1,722 over the five year term of the borrowing. There is no early settlement charge with this personal loan.
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%.