Personal loan rates at lowest-ever levels
Personal loan rates for sums of £5,000 and £7,500 have fallen to their lowest ever.
The average rate for a £5,000 loan is 6.05%, which is just over a fifth lower than it was at the start of 2015, according to analysis by MoneySuperMarket.com.
The average rate for a loan of £7,500 is 4.19%, some 16 percentage points lower than what it was at the beginning of the year. The reduction in rate would save a borrower £168 over five years.
The rates on loans between £15,001 and £19,999 have also been cut by several lenders over the past month.
Sainsbury's reduced its rate from 5.8% to 3.6% for repayments over a maximum 36-month term and made them available to new customers.
The comparison explained that previously "sub 4% rates weren't unusual in the higher borrowing category, but they were 'existing customer only' loans".
It added: "Since the beginning of July, both Sainsbury's and Cahoot (loans provided by Santander) have re-priced loan rates to 3.6%, opening up a more competitive loans market. Overall, Ratesetter has the lowest loan rate in this category at 3.5% but it comes with a £51 borrowing fee."
Personal finance expert Andrew Hagger of Moneycomms.co.uk said: "The record low personal loan rates we are seeing now have been driven by competition among some of the banks and more recently peer-to-peer providers RateSetter, Zopa and Lending Works.
"The traditional high street banks are less competitive in this space (exceptions are Santander and Nationwide) – the price war has in the main been driven by the likes of Tesco Bank, Sainsbury's Bank, Cahoot and M&S."
Hagger pointed out that lenders tend to cherry pick and be more competitive for larger loans i.e. £7,500 and above, and this is where you'll find the best deals. For example, Cahoot, Zopa and M&S Bank are joint top at 3.6%APR. Nationwide is offering the same rate too – but only for existing customers.
However, the rates on smaller sums are much higher with lenders blaming this on the fact that default rates tend to be higher on such sums. His research has found that many high street providers charge rates "well into double figures at this level, with Barclays today quoting 22.9% for a £3,000 loan over three years and Halifax 18.9% for the same amount/term".
He suggested borrowers looking for loans of this size could instead consider using a credit card that permits money transfer – which is the ability to transfer cash from your credit card limit into your current account. MBNA and Virgin Money are the only two card providers that allow this.
With the MBNA Platinum credit card you can take a 0% money transfer deal for 24 months with a one-off fee of 1.99%, or for 36 months with a 2.99% fee. Hagger said this is "a smart way to obtain low rate finance as long as you are disciplined enough to make the regular repayments every month".
He explained: "On a £3,000 loan your only cost is £59.70 (1.99% fee) or £89.70 (2.99% fee) – a shrewd financial move when you consider the Barclays 22.9% example mentioned above would cost you £1057.71 in interest over three years."
Kevin Mountford, head of banking at MoneySuperMarket, said: "Lenders have slashed personal loan rates in recent years, and we're still continuing to see them fall now, with a notable drop in the average rate over the last month. Anyone thinking about borrowing money should take advantage of these low rates now, as there is no guarantee on how long they will remain at this level, especially with recent speculation of a rise in Bank of England Base Rate."
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.
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%.