The cheapest loan rate is now 6.3% APR. That's still good value but there are a couple of ways you can do even better!
As you no doubt know, interest rates have been rising recently and rates for personal loans have been following suit. But do they still offer decent value for money?
At one stage, rates for personal loans dipped as low as 5.5% APR. This rate was offered for a short time by Moneyback Bank. Now the cheapest rate you can get has risen to 6.3% APR.
While that may seem like a big increase, in terms of the amount you pay each month it's not quite as bad as it sounds, especially for loans over short periods. The table below show the difference, using figures from the Fool's loan calculator. Naturally, all the figures are for loans without payment protection insurance.
| £5000 over 3 years | Monthly | Total |
|---|---|---|
| 5.5% APR | £150.01 | £5,400.31 |
| 6.3% APR | £151.62 | £5458.32 |
| Difference | £1.61 | £58.01 |
| £5000 over 5 years | Monthly | Total |
|---|---|---|
| 5.5% APR | £94.77 | £5,686.20 |
| 6.3% APR | £96.46 | £5787.60 |
| Difference | £1.69 | £101.40 |
| £5000 over 10 years | Monthly | Total |
|---|---|---|
| 5.5% APR | £53.67 | £6,442.80 |
| 6.3% APR | £55.54 | £6,664.80 |
| Difference | £1.87 | £222.00 |
As you can see, in all cases the increase is less than £2 a month. For the three-year loan the total extra amount you pay is £58, just over 1% of the initial loan amount. For a ten-year loan however, the additional payment is almost four times greater at £222.
The table also highlights the false economy of paying a loan over a longer time period. While the monthly payments you make for a ten-year loan are just over a third of those for a three-year loan (£55.54 vs. £151.62) the extra interest you pay is considerable. The three-year loan at 6.3% APR costs you just £458 in interest. The ten-year version costs you £1,665!
While 6.3% is good, it's much less than you'd pay on standard variable rate mortgage for example, there are a couple of ways dedicated Fools may be able to do better.
1. Lifetime balance transfers
The first is to use what is known as a lifetime balance transfer credit card. These aren't as popular as 0% balance transfer cards, but you can currently get a rate of 4.9% with the Marks & Spencer Money &More card. There are also a handful of other cards offering around 5.9%.
As with other credit cards, you have to make a minimum monthly payment. The &MORE card requires the higher of 3% and £5. So in an example of a £5,000 loan, you'd initially have to make monthly payments of £150, equal to the three-year loan. Some of these cards also have balance transfer fees, which will add your costs.
So what's the catch? If you spend on these cards then you'll be charged at the full rate for new purchases, which is likely to be in excess of 15%. So use another card for new purchases.
2. Zopa
The second way to get a better rate is to try the online lending exchange Zopa. The rate you'll get depends what category of borrower you're classed as. You won't always be able to beat the lowest rates available on personal loans - it will depend what people lending via Zopa are offering at the time.
The rate you're offered will also vary depending on how much you want to borrow and for how long. From what I've observed, Zopa seems to offer the best rates for smaller amounts (say £3,000 or less) and for periods shorter than three years.
Compare personal loans and lifetime balance transfer cards.