Cheap Credit On The Horizon

As several lenders reduce personal loan rates this year, could this herald the end of the credit crunch?

In the last few months we've discussed the global credit crunch at length and what it could mean for borrowers in the UK this year. Increased costs for credit alongside a higher decline rate are expected to become the norm as lenders financed through the wholesale markets find it difficult to come by funding themselves.

So it's surprising, not to mention welcome respite, that five lenders have already reduced the interest rates payable on personal loans in the first two weeks of January, some by as much as 3%. Only last October a number of loan rates jumped by an equivalent amount but, just three months later, the tide appears to be turning. The new rates are shown in the table below:

Latest Loan Rate Reductions

Source: Moneyfacts.

*= Telephone loans with redemption charges

**= Online loans with redemption charges

***= Online loans without redemption charges

With interest rates on personal loans starting to fall, does this mean that the squeeze on credit for individual borrowers won't be as bad as we originally thought?

The cost of borrowing on the wholesale markets certainly appears to have come down recently, making it cheaper for lenders to get credit. Indeed, three-month sterling LIBOR (the London Interbank Offered Rate) - which is the rate at which banks lend to each other through the wholesale markets - has fallen rapidly. Back in December LIBOR stood at 6.65% (as at 5/12) but today the rate has dropped to just 5.61% putting it much closer to the current Bank of England base rate (5.5%).

This could account for cheaper loan rates being passed on to individual borrowers. Without question, it's a step in the right direction for those of you who need credit now, but we shouldn't underestimate the impact of the credit crunch going forward on the basis of a little good news.

January is usually a busy time for debt consolidation as borrowers resolve to get their financial affairs in order. Debt consolidation involves rolling all your debts up into one easy-to-manage lower-cost loan. Lenders, which have cut personal loan rates this month, may simply be having a crack at capturing a bigger share of the debt consolidation market.

The chances are the recent cuts probably aren't yet indicative of a more widespread trend of falling costs for credit. It's certainly premature to conclude the beginning of the end of the credit crunch has arrived just because a few lenders are marketing cheaper loans.

In the not so very distant past (just two years ago, in fact), market-leading lenders offered personal loans at around 6% but this is unheard of today. So relatively speaking, credit is still more costly now than it has been.

What's more, the rates quoted in the table are typical and not necessarily guaranteed. If you have a chequered credit history you may find the rate you're offered by the lender isn't nearly as competitive. Indeed, according to Moneyfacts, the interest rate offered to the applicant differs from the typical APR rate quoted in almost 9 out of 10 applications.

It's likely lenders will continue to be cautious for some time to come with a greater number of applicants being rejected for credit than before. Those who are successful will probably find that unless they have an excellent credit rating they won't be eligible for the typical quoted rates either. While falling loan rates would seem suggest the squeeze on credit may be easing off, other signs - such as mortgage lenders increasing the size of the deposit they expect from borrowers - suggest it may be getting worse. In other words, we're still a long way from concluding the worst of the credit crunch has passed, which means if you want to snap up a personal loan at a cheap rate, you'd better get a move on... 

More: Up Your Chances Of Getting A Loan | How To Get A Top Notch Loan | If you need a loan, compare quotes at The Motley Fool's Personal Loan Centre.