Loan rates coming down
Loan rates look set to be on their way down but the best deals are being reserved for existing customers.
According to uSwitch, there is a growing trend among lenders to offer existing customers preferential rates.
Nationwide is the latest one to jump on the bandwagon by reducing its personal loans rate to 7.7% APR - making it the cheapest rate available on the market - for loans between £5,000 and £14,999 for its current account customers.
The low rate applies whether the loan is taken out through branch, telephone or internet.
To qualify for the loan rate, current account customers must have a monthly turnover of at least £750, and the offer only applies to new Nationwide personal loan customers.
Chris Rhodes, product and marketing director at Nationwide, says: "We are rewarding our current account customers with the lowest personal loan rate in the UK which underlines further the benefits of taking out and using a Nationwide FlexAccount. This will be the first of many offers for Nationwide current account customers over the coming months."
There are currently 13 loan deals available for existing customers at an average APR of 8.5% compared with an average of 9.2% for deals targeted to new customers.
Louise Bond, personal finance expert at uSwitch.com, says: "At the moment, loyalty really is king and many consumers could find a preferential loan rate with their existing provider. It's definitely worth finding out what they can offer you before you search the rest of the market."
But while the lowest rate might be at the forefront of your mind when shopping for a personal loan, there are several other important factors you should also consider.
This is because the features of a loan could have a huge bearing on how it affects your overall finances. Here are some of the things you should think of before signing on the dotted line:
The majority of personal loans offer fixed interest rates so your monthly repayments will stay the same for the duration of the debt. The most important rate to look out for is the Annual Percentage Rate (APR) as this will take into account the interest on a loan plus any additional charges making it easier for you to compare products like-for-like.
Remember that you might not get the typical APR advertised by a loan company - this is the best rate it will offer so if your credit rating doesn’t come up to scratch then you are likely to be offered a higher rate.
When you apply for a loan the lender will check your credit rating to see your history of borrowing and repayments, and help it decide your level of risk. The riskier it thinks you are the more interest you are likely to have to pay, so having a clean record really does pay off.
Your credit report will include the balance, credit limit and payment history of all your outstanding accounts, as well as settled ones that are less than six years old.
Before applying for a personal loan it is well worth checking your credit rating - if there are any black marks and your application is rejected then this will deteriorate your rating even further.
Checking your credit can also reveal any mistakes or fraudulent activity.
If you do have a chequered credit record then there are steps you can take to improve your rating.
For example, ensuring you are on the electoral role or paying off existing debt will both improve your profile.
Penalties and payment breaks
Some loan companies will charge you a penalty if you want to pay off your debt earlier than originally agreed. However, early repayment charges are only permitted on loans of £25,000 or less with more than one year left on the term. If you are due to pay off your loan within the next year then you will not have to pay a penalty.
Another thing to consider when shopping for a personal loan is whether you might want to take a deferred payment - this is a break between when you first receive the loan and when the first repayment needs to be made. Some loans also offer payment breaks to give you a month off meeting a repayment.
However, bear in mind that interest is charged over any payment break period.
You can opt to take out payment protection insurance (PPI) alongside your personal loan, either directly from the lender or from another provider. However, this insurance is not compulsory and might not be the right thing for you.
PPI will cover your repayments should you be unable to work because of unemployment, accident, sickness or even death.
If you are considering taking out PPI then make sure you read the small print - the policy might not be suitable for your needs meaning you are paying for nothing.
PPI is currently being investigated by the Competition Commission amid concerns that many consumers are being sold policies that are not suitable for them.
Many PPI policies are added to the loan, meaning the interest you pay include the loan amount as well as the cost of the insurance. This can be extremely costly adding hundreds or even thousands of pounds to the cost of a loan.
However, if you do decide to plump for PPI, then it is essential you shop around - 80% of PPI policies are sold by bank providing the loan but research suggests that buying from a direct provider is the cheapest way to insure your repayments.
Payment protection insurance is designed to cover you should you fall ill, have an accident or lose your job and can’t make repayments on loans or credit cards. However, research by consumer watchdogs found the cover to be overpriced, filled with exclusions (policies exclude self-employment, contract employees and pre-existing medical conditions) and were often mis-sold because the exclusions were never fully explained. In May 2011, the High Court ruled banks had knowingly mis-sold PPI and ordered them to compensate around two million consumers.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
A report containing detailed information on a person’s credit history, a record of an individual’s (or company’s) past borrowing and repaying, including information about late payments and bankruptcy. It also includes all applications a person has made for financial products and whether they were rejected or accepted. Your credit report can be obtained by prospective lenders to determine your creditworthiness.
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%.
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