Loans Under 6% Won't Last!

Banking and Borrowing

13 January 2006 | 0 Comments

Several lenders have slashed their personal loan rates for the January sales. However, don't expect low rates to last for long, because they should soon start to climb!

Each year, there is a surge in lending in January, as borrowers recover from their New Year hangover and start to tackle the financial hangover caused by over-spending at Christmas.And each year, the January sales go much further than the high-street shops, with more than a few lenders cutting interest rates on their personal loans in order to win more business. They know that this is one time of year when some people's credit-card statements are so hefty that they almost can't fit through the letterbox!Also, many people pay for winter breaks or go on a spending spree in the January sales, leading to yet more business for personal loan providers. And, of course, many people vow to sort out their finances as part of their New Year's resolutions, with many taking out personal loans to pay off other debts.Why I predict loan rates will rise in 2005Last year saw interest rates on personal loans hit record lows, with the Best Buy tables filled with loans with rates under 6% APR for most of the year. However, towards the end of 2004, several leading lenders began hiking their rates, moving above the 6% mark and out of the Best Buy tables. I expect many lenders to follow suit and hike their rates, for two reasons.First, the personal loan market is fiercely competitive, and lenders have responded by cutting their margins. With the Bank of England's base rate at 4.75% a year, lending money at 6% APR is tricky, especially when bad debts are taken into account.Second, lenders boost their lending profits by selling costly payment protection insurance (PPI). Although this protection against accident, sickness and unemployment is optional, high-pressure sales techniques mean that around seven out of ten loan customers buy PPI. Hence, lenders have been accused of the widespread mis-selling of personal loan protection.However, from tomorrow, the Financial Services Authority takes over the regulation of this PPI (and other general insurance policies). This should stamp out some of the lenders' shadier selling practices but, obviously, will also reduce their profits. Hence, I assume that lenders will put up their interest rates in order to maintain their profit margins.The top ten Best Buys (as at 13 January 2005)According to independent financial provider Moneyfacts, these lenders currently top the Best Buy tables for personal loans (based on a loan of £5,000 repayable over three years, without PPI):Best Buypersonal loansLenderTotal interestbill (£)Total AmountRepayable (£)(1)Typical AnnualPercentageRate (APR%) (2)Abbey (online)4485,4485.8Direct Line (online)4555,4555.9Direct Line4555,4555.9Lombard Direct (online)Apply via the Fool4555,4555.9Alliance & LeicesterApply via the Fool4585,4585.9Smile (online)- from Co-op Bank4635,4636.0Lombard Direct4945,4946.4The AA (online)Apply via the Fool(3) 4995,499 5.8Amberloan (online)- from Skipton BS5025,5026.5Liverpool Victoria (online)Apply via the Fool5025,5026.5Notes:(1) Note that the TAR equals the total interest bill and other charges, plus what you borrowed (in this example, £5,000).(2) The typical APR is offered to two-thirds of successful loan applicants. The rate that you receive may be higher if your credit history isn't spotless, or your credit score is lower than the lender's ideal score. (3) This loan offers a three-month payment holiday, which reduces its APR, but slightly increases the total interest bill.(4) Each of these loans charges an early settlement penalty of two months' interest. This penalty ranges between £25 at Abbey and £28 at Liverpool Victoria.Note that Nationwide BS deserves an honourable mention for its loan because, unlike all the above lenders, it doesn't charge typical APRs. All successful applicants get its low rate of 6.7% APR, with a TAR of £5,517, putting it just outside of our table. Its loans are available via the Fool too.Finally, if you're scouting around for a personal loan, read The Pros And Cons Of Personal Loans and Top Ten Loan TipsBEFORE you sign on the dotted line!More: Get a bargain loan in our Personal Loan centre | How To Spot Bogus Interest Rates.

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