Small loan borrowers getting a raw deal
The difference between the best and worst deals on a £3,000 personal loan over three years is £851, and an eye-watering £1,481 over five years, according to new research.
Number crunching by Andrew Hagger of Moneycomms.co.uk has revealed that while interest rates are at record lows for those seeking to borrow £7,500 or more, those who want to borrow less are getting a raw deal by comparison.
"The established big banking names may be busy pulling out all the stops to win new custom in the current account war, but when it comes to lower-value personal loans they're seemingly not interested and extremely uncompetitive," said Hagger.
He said that while there are currently five lenders offering loans of £7,500 or more at 5% APR or below, for smaller amounts the majority of lenders are charging well into double figures – and in some cases almost 25% APR.
Hagger's research found that some cheaper options are available, but not from the big high street banks. Instead, for borrowers looking for loans of up to £3,000, he recommends MBNA and peer-to-peer lenders Zopa and Ratesetter.
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While the MBNA Rate for Life isn't strictly a personal loan, he says there's nothing to stop you using this 'fixed rate for life' credit card in the same way by setting up a direct debit to ensure your monthly payment is made on time every month. Any purchases made in the first 90 days are charged at an interest rate of 6.9% APR for as long as it takes you to clear the balance.
"Peer-to-peer lenders Zopa and RateSetter both offer sub-10% rates and can also save you a small fortune in interest costs when compared with some of the big banks," he adds.
£3,000 borrowed over a term of five years
|LENDER||RATE (APR)||MONTHLY||TOTAL PAYABLE|
|MBNA Rate for Life||6.9%||£59.00||£3539.00|
Data researched by Moneycomms.co.uk from provider websites 23 September 2013
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.
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%.