Will Loans Get Cheaper?

One leading provider of personal loans has cut its interest rates. Will other lenders follow suit, or is credit still crunched?

Earlier this week, Moneyback Bank, a leading provider of personal loans, announced a cut in its interest rates. Since its launch by Alliance & Leicester in June 2005, Moneyback Bank has been almost permanently resident in the Best Buy tables for loans. This week, it cuts its rates on loans of between £7,500 and £15,000 by 0.6%, down to 7.8% typical APR.

However, Moneyback Bank actually increased its rates by 0.8% three weeks ago, so this latest move means that its rates are still higher they were a month back. Nevertheless, this cut propels Moneyback Bank back among the market leaders, as the following table shows:

Best Buy loans for £10,000 over five years (without payment protection insurance)

As you can see, borrowing £10,000 over sixty months will cost you about two grand in interest, with monthly repayments of around £200. Although this may seem fairly competitive, rates were much lower last year. Indeed, in early 2007, several lenders were dishing out loans at rates under 6% APR. Hence, thanks to the ongoing credit crunch, interest bills on personal loans have risen by about a third.

Are rates poised to fall?

Although this move by Moneyback Bank may signal the start of a round of rate cuts, I doubt that other lenders will follow suit. To me, a rate rise of 0.8% followed by a rate cut of 0.6% suggests that the bank decided to ease off by dropping out of the Best Buy tables for a few weeks.

What's more, given the huge uncertainty in the banking industry at present, I would be very surprised to see personal-loan providers make authentic cuts to their interest rates. Frankly, banks are experiencing some of the worst conditions seen for a century, and they plan to rebuild their profits by increasing -- not reducing -- margins. Thus, any rate changes are likely to be short-term shuffles, rather than any long-term campaign to reduce the cost of borrowing.

Five ways lenders fleece you

By shopping around, you can save hundreds (or even thousands) of pounds during the life of your loan. However, you should tread carefully in order to avoid these five traps:

1. CHAPS fees: some lenders charge you a steep fee for delivering same-day funds. For example, a speedy CHAPS payment from Lombard Direct will set you back £45.

2. Courier charges: a few lenders will rush your loan agreement or cheque to you by courier. At Sainsbury's Finance, this service costs £50.

3. Payment holidays: at Tesco Personal Finance, your first loan repayment comes out after three months, instead of one. Alas, this two-month break bumps up your interest bill, making your loan more expensive. As ever, convenience comes at a cost!

4. Typical APRs: the typical APRs quoted by lenders must be applied to two-thirds (67%) of loans granted. However, your rate may vary and could be considerably higher than that advertised.

5. Payment protection insurance: last but not least, we have PPI. Never buy this rip-off accident, sickness and unemployment cover from a lender. If you need this protection, then buy it from an independent provider, such as award-winning Fool partner British Insurance.

Finally, when you're looking for a loan, be sure to use an independent, unbiased loan search engine. Otherwise, you may miss out on the best deal on the day!

More: Find lovely loans via the Fool | Five Ways To Beat The Credit Crunch | Overdrafts Are Getting Too Expensive