Low-cost personal loans are becoming a dying breed as lenders seek to grow their profits by raising interest rates.
As we predicted last November in The Last Of The Low-Rate Loans, lenders have responded to rises in the Bank of England's base rate by increasing the interest rates charged on personal loans.
Alas, personal loans with interest rates below 6% APR are becoming a vanishing breed. In fact, according to independent financial researcher Moneyfacts (which powers the Fool's search engines for credit cards, personal loans, savings accounts and so on), sub-6% loans are now virtually extinct.
As a matter of fact, the only lender left in this field is Masterloan, which charges a typical APR of 5.9% on loans of £5,000 to £15,000. However, not all applicants will qualify for this ultra-low rate, and many will be rejected as the lender cherry-picks the best borrowers.
With total personal debt hitting a record £1,300 billion earlier this year, and bad debts shooting up, lenders have become much more cautious about throwing money at every man and his dog. What's more, lenders are worried about the Competition Commission's investigation into rip-off payment protection insurance (PPI), which boosts their profits by £5 billion a year.
Indeed, with interest-rate margins at wafer-thin levels, many leading lenders make more money from flogging overpriced PPI than they do from lending money itself. If lenders are forced to open up the PPI market to greater competition, falling PPI premiums could lead to even higher interest rates as lenders seek to shore up their sky-high profits.
In the first week of this month alone, eight personal-loan providers increased their interest rates -- including one rise of seven full percentage points, as the following table reveals:
Lender | Loan size | Previous | New rate | Change |
|---|---|---|---|---|
Alliance & Leicester | £7.5k to £20k | 5.9 | 6.3 | 0.4 |
Direct Line | £2k to £2,999 | 14.9 | 16.9 | 2 |
IF (with redemption) | Up to £1,000 | New tier | 16.9 | - |
Lloyds TSB | £7.5k to £25k | 6.4 | 6.9 | 0.5 |
Lombard Direct | £2k to £2,999 | 14.9 | 16.9 | 2 |
MINT | £1k to £4,999 | 15.9 | 16.9 | 1 |
Moneyback Bank | £7.5k to £20k | 5.9 | 6.2 | 0.3 |
MBNA Europe Bank | £1k to £4,999 | 7.9 | 14.9 | 7 |
Source: Moneyfacts
This trend towards rising rates suggest that lenders have given up trying to lend money at under 6% a year in a period during which the Bank of England's base rate has climbed from 4.5% a year to 5.25%. The latest hikes suggest that leading lenders have given up writing business at a level which was simply not sustainable, and are trying to bring their loan books onto a firmer footing.
One thing has remained the same, though: the more that you're prepared to borrow, the better your rate will be. Smaller loans (such as under £5,000) are looking decidedly more expensive these days. Indeed, interest rates on smaller loans can be twice those charged on, say, a loan of £10,000+. Hence, if you want to borrow a smaller sum, then you may be better off using a 0% credit card.
Finally, with over seventy different personal loans available, it pays to do your homework before shopping around. For my twelve tips on finding the perfect personal loan, read The Loan Arranger Rides Again. Of course, don't be tempted to borrow more than you can comfortably afford to repay, unless you want to be on first-name terms with your local bailiffs, that is!