Getting credit is becoming increasingly expensive. Here's how to keep your interest costs down.
The repercussions of the global credit crunch remind me of throwing a very large rock into a still lake and watching the consequences ripple far and wide. In its wake, mortgages have already begun to get more expensive even though the base rate hasn't risen since July. Now it's the turn of personal loans as Moneyfacts reports nine lenders have stepped up interest rates this week alone, with some loans soaring by as much as 4%.
The table below outlines the increases which have taken place this week to loans of £5,000 repaid over a three year period. Although some are worse than others it seems to indicate a general trend of rising costs for credit. Other lenders have also hiked rates for different levels of borrowing.
Lenders Who Have Raised Personal Loan Interest Rates This Week:
Provider | New Rate | Applies To Loans Of | Change | Monthly repayments before / after rate rise | Monthly Increase | Total Increase Over The Term |
|---|---|---|---|---|---|---|
Bradford & Bingley | 9.9% | £5,000 to £7,450 | +3.2% | £161.42/ £153.35 | £8.07 | £290.52 |
Cheshire | 9.9% | £5,000 to £7,450 | +3% | £161.42/ £154.33 | £7.09 | £255.24 |
Derbyshire BS | 9.9% | £5,000 to £7,450 | +3% | £161.42/ £153.90 | £7.52 | £270.72 |
Eskimo Loans | 9.9% | £5,000 to £25,000 | +1% | £160.23/ £158.05 | £2.18 | £78.48 |
Masterloan | 6.8% | £4,000 to £25,000 | + 0.3% | £152.93/ £153.57 | £0.64 | £23.04 |
Northern Rock | 7.9% | £1,000K to £25,000 | +0.5% | £155.72/ £154.82 | £0.90 | £32.40 |
Norwich & Peterborough BS | 9.5% | £5,000 to £9,999 | +0.7% | £162.03/ £160.45 | £1.58 | £56.88 |
Just a few months ago it was possible to pick up a best buy loan for less than 6%. But banks and building societies are beginning to take a far more cautious approach to lending. Money lending is becoming an increasingly dicey business with mounting levels of bad debt. Not only are we seeing rising rates but even getting accepted for a loan in the first place could become more difficult, as lenders become anxious to manage the risks.
Given that personal loans are becoming a more costly way to borrow - we've said it before and we'll say it again - you'll need to shop around to find a competitive deal. The lowest rate personal loan I can find at the moment charges an interest rate of 6.3% (APR) on a debt of £5,000 over three years. Here the total amount you'll have to repay is £5,486. But if, like many of us, you go for a more middle of the road loan which charges 12.9% (APR) you'll end up having to repay £5,995. This is more than double the amount of interest and really is a needless waste of your money.
Personal loans still have their place in providing the peace of mind that comes with knowing exactly when you'll be debt free. What's more, if you choose a fixed rate deal you'll know upfront how much you'll need to repay while avoiding the shock of a sudden interest rate hike.
So if you decide a personal loan is the way to go, here are five tips for getting a good deal:
- Choose a flexible loan - this will allow you to overpay or redeem the loan early without getting stung by a penalty.
- Choose a fixed rate loan - you'll know exactly how much your monthly repayment will be and you'll avoid getting hit by rising interest rates.
- Choose an unsecured loan - a loan that's secured on your home could put it at risk if you fall behind on your repayments. Unsecured loans reduce this risk as your home is not used as security for the loan.
- Don't choose payment protection insurance (PPI) - although it sounds sensible, this type of insurance really is poor value for money and can significantly increase your repayments.
- Do shop around - enough said!
Don't forget there are other ways to borrow that may be better for you. The market for 0% credit cards for balance transfers and purchases is still going strong with generous extensions to interest-free periods. But you'll need to be more disciplined and ensure your credit is fully repaid before the interest-free periods comes to an end. Otherwise you'll get a kick in the teeth when the interest rate reverts to the typical APR.
Alternatively, you could consider moving existing credit cards debts to a new lifetime balance transfer card which charges a relatively low interest rate until the transferred balance is repaid. The most competitive on the market scrapes in at just under 5%.
More: Six Great Tips For Getting A Personal Loan | Avoid This Enormous Rip-Off! | Compare unsecured personal loans.