Loan rates soar
Personal loan rates have soared over the past three years despite the base rate being at an all-time low.
Research by Defaqto found the average unsecured personal loan rate has increased from 8.8% in 2007 to 12.9% today.
Kevin Bray, insight analyst for banking at Defaqto, says: "The increasing cost of unsecured lending reflects the lack of appetite for risk in this area with many providers suffering from high arrears and default rates. Additionally the number of providers has reduced by a third since 2007 and of those remaining the focus has been on offering unsecured products to their existing customers.
"There is some good news for consumers, following the recent announcement from the government about changes to credit card rules and in particular how payments are allocated.
"From January 2011 providers must allocate payments to the transactions attracting the highest rate of interest and this is expected to collectively save consumers between £300 million and £500 million."
The good news is that if you shop around, it’s still possible to find a competitive personal loan.
So what's the best way to find a personal loan that will work for you?
• Shop around. Personal loans are available from banks, building societies, supermarkets and other finance companies so make sure you compare rates. Go to our Compare & Buy to find the best loan for you.
• Keep an eye on your credit history. Loan providers will offer their best rates to people with a good track record of handling credit so check your credit report.
• Don’t buy payment protection insurance alongside the loan. If you decide you need this cover you’ll probably find it cheaper elsewhere instead of buying it from your loan provider.
• Speak to your bank. Some banks offer cheaper loan rates to current account customers.
• Consider whether a personal loan is the best option. In some cases a low–rate credit card might be better or if you’re buying a car you might find a better finance deal from a car dealership
A homeowner’s worst nightmare; repossession is an action of last resort by mortgage lenders to recover money from borrowers that have failed to keep up with repayments on their mortgage or other loan secured on their home (see secured loan). Repossession is a legal procedure that has to go through several processes before the homeowner is evicted and the property reposed. These are: if a borrower keeps defaulting; the lender applies for a solicitor’s notice; the lender instigates possession proceedings through the court; at the court hearing a possession order is granted and sometimes a possession warrant; a bailiff is appointed and an eviction notice issued at which point the homeowner has two to three weeks to vacate the property.
As the name suggests, secured loans require security, or “collateral”, usually in the form of property, a motor vehicle, or another valuable item, as a guarantee for the loan. This effectively reduces the level of risk to which a lender is exposed, as the lender has a claim against your home, or other effects, if you default. Secured loans are often available at competitive interest rates. Types of secured loans include mortgages, logbook loans and some types of hire purchase where the loan is secured on the goods you’re buying and these are repossessed if you default.
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.
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.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
“Arrears” tend to be associated with debt. If you fall behind and miss payments on any outstanding debt, the amount you failed to pay is an arrear – the amount accrued from the date on which the first missed payment was due.
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.