Interest rates on personal loans have steadily risen over the past two years. But if you know where to look, you can still get a competitive deal...
If you’re a little strapped for cash, you might be considering whether it’s worth taking out a personal loan. However, if you are, the bad news is, over the past two years, interest rates have gone up by almost 17% on loans of £5,000. Ouch.
But on the flipside, the good news is, it is still possible to get a competitive rate of interest from a handful of lenders. And in some cases, the rates they are offering are actually falling.
The best rates
Recent research from Sainsbury’s Finance has revealed that only six lenders offer rates below 9% APR on a £5,000 loan. In comparison, in 2008, 11 lenders offered rates below 9%.
|
Interest rates offered on £5,000 loan |
Number of loans available publishing these interest rates in August 2008 |
Number of loans available publishing these interest rates in August 2010 |
|
Sub 9% |
11 |
6 |
|
9 - 9.9% |
5 |
1 |
|
10 – 10.9% |
10 |
0 |
|
11 – 11.9% |
3 |
0 |
|
12 – 12.9% |
6 |
9 |
|
13 – 13.9% |
2 |
2 |
|
14 – 14.9% |
1 |
1 |
|
15.0% and over |
1 |
2 |
Source: Moneyfacts
So it’s clear that interest rates on personal loans have certainly followed an upward trend over the past couple of years. Nowadays, the majority of lenders offer loans in the region of 12-12.9% and yet, back in 2008, the majority of lenders offered loans at under 9% - a significant change.
But before you get too despondent, remember that six lenders do still offer low interest rates on loans of £5,000. So let’s take a closer look.
Top six rates for small loans
The table below highlights six personal loans that offer interest rates below 9%. I have based this on the need for a £5,000 loan, repayable over the course of three years.
|
Personal loan |
Typical APR |
Monthly repayment |
Total interest charged (to nearest penny)* |
Early repayment charges |
Need to know |
|
8.7% |
£157.54 |
£671 |
One month’s interest
|
Need to have a Nectar card. Interest rate offer valid until 26/10/10 |
|
|
8.7% |
£157.54 |
£671 |
One month’s interest (if loan is set up for more than 12 months) |
Available to new and existing customers |
|
|
8.7% |
£157.54 |
£671 |
One month’s interest (if loan is set up for more than 12 months) |
Available to new and existing customers |
|
|
8.7% |
£157.54 |
£671 |
Up to two months’ interest |
Customers can defer their payment by two months at the start of the loan |
|
|
8.9% |
£157.97 |
£687 |
One month’s interest |
Must be a First Direct 1st Account customer |
|
|
8.9% |
£157.97 |
£687 |
No fee |
|
So, as you can see, if you know where to look, it is still possible to get a decent rate of interest on a loan of £5,000. Sainsbury’s, Tesco, Alliance and Leicester and Santander all offer competitive rates of 8.7%. And First Direct and the Post Office aren’t far behind at 8.9%.
What's more, Sainsbury's Finance is one of just three lenders whose interest rates on loans of £5,000 has actually decreased.
Top rates for larger loans
If you need to borrow a bit more, however, you’re likely to get an even better rate of interest. Of course, lenders like to encourage you to borrow more by offering more attractive interest rates on larger loans.
Take a look at the following table which is based on the need for a £10,000 loan, repayable over the course of five years.
|
Personal loan |
Typical APR |
Monthly repayment |
Total interest charged (to nearest penny)* |
Early repayment charges |
Need to know |
|
7.5% |
£199.21 |
£1,953 |
28 interest for loans of 12 months. 58 days interest for loans of more than 12 months |
Must be an Nationwide FlexAccount customer |
|
|
7.6% |
£199.66 |
£1,980 |
One month’s interest (if loan is set up for more than 12 months) |
Available to new and existing customers |
|
|
7.6% |
£199.66 |
£1,980 |
One month’s interest (if loan is set up for more than 12 months) |
Available to new and existing customers |
|
|
7.6% |
£199.66 |
£1,980 |
Up to two months’ interest |
Must be an existing Tesco loan customer. Apply by 10/11/10. Customers can defer their payment by two months at the start of the loan |
|
|
7.7% |
£200.10 |
£2,006 |
One month’s interest
|
Need to have a Nectar card. Interest rate offer valid until 26/10/10 |
|
|
7.7% |
£200.10 |
£2,006 |
Up to two months’ interest |
Apply by 10/11/10. Customers can defer their payment by two months at the start of the loan |
In this case, the rates of interest are even more competitive. The Nationwide Personal Loan offers the best rate, after the rate was recently cut to 7.5%. However, the drawback to this loan is that you’ll need to have a FlexAccount.
But if you don’t qualify for the Nationwide loan, don't panic, because the offerings by Tesco, Alliance and Leicester and Santander aren’t far behind at 7.6%. In fact, using the examples above, by taking out one of these loans instead of the Nationwide loan, you’d only lose out by 45p a month – so nothing too significant.
And in terms of overall interest paid on the £10,000 loan, you will only be paying a total of £27 more if you take out the Alliance & Leicester Personal Loan, the Santander Personal Loan or the Tesco Bank Existing Customer Personal Loan instead of the Nationwide Personal Loan. So again, the difference isn’t huge.
John Fitzsimons looks at the crucial things to remember before you apply for a loan
Of course, the decision to take out a larger loan shouldn’t be taken lightly, but the interest rates above are pretty decent, should you decide to do so.
However, if you are contemplating taking out a personal loan, try to keep the term of your loan as short as possible and avoid taking a repayment holiday. That’s because if you do, you’ll actually end up paying more interest as you’ll incur interest charges while you’re taking your holiday. So steer clear.
For more top tips, read Six top tips for an affordable loan.
*Figures don’t take into account any interest incurred during optional payment holidays or deferral periods.
More: The five cheapest ways to borrow | Why a credit card is better than a loan