Ther personal loan market is getting even more competitive as the Derbyshire Building Society cuts its rate to 5.8%.
Interest rates for personal loans are now well below their level prior to the financial crisis.
Unlike mortgages, loans actually became more expensive after the economy started crashing five years ago. But in 2011 a small number of lenders started to cut rates.
Just before the credit crunch struck in September 2007, the cheapest personal loan on the market cost 6.3% a year. By summer 2009 the cheapest rate was 7.9%.
Over the last few months we’ve seen several price cuts from the likes of Tesco and Sainsbury’s and Derbyshire has now pushed into the lead with a price cut to 5.8%.
That’s a pretty attractive rate and it’s certainly far cheaper than a payday loan, a pawn broker or even borrowing via a conventional credit card. That said, a 0% card will obviously be cheaper than a personal loan.
Let’s see how Derbyshire’s loan compares to the other top personal loans on the market.
Best personal loans - £10,000 over five years
|
Loan |
APR |
Total amount repayable |
Monthly repayment |
|
5.8% |
£11,502.60 |
£191.71 |
|
|
5.8% |
£11,502.60 |
£191.71 |
|
|
5.9% |
£11,529 |
£192.15 |
|
|
5.9% |
£11,529 |
£192.15 |
|
|
5.9% |
£11,529 |
£192.15 |
|
|
Yorkshire Bank Online Personal Loan |
5.9% |
£11,529 |
£192.15 |
|
Barclayloan Plus (existing customers only) |
5.9% |
£11,529 |
£192.15 |
|
M&S Personal Loan |
6% |
£11,555 |
£192.59 |
|
First direct Existing Customer Personal Loan |
6.1% |
£11,581.80 |
£193.47 |
The only problem is that not everyone will be able to get a loan at the above rates. If your credit score is weak, lenders may refuse to lend to you at all. And even if they are willing to lend, it may be at a higher rate than in the above table.
The rates in the table are all ‘representative’ APRs which means that lenders only need offer their best rates to 51% of successful applicants.
Still, we shouldn’t get too gloomy. Plenty of people will be able to borrow at these low rates and remember, the best loans are 2% cheaper than they were three years ago.
Overpayments
There’s another reason why personal loans have become more attractive. Paying off your loan early has become much less expensive. A change in the law means that you almost certainly won’t have to pay a penalty for overpayment on any loan taken out after February 1st 2011.
You’ll only have to pay a penalty where all three of the following circumstances apply:
- You overpay more than £8,000 in a 12-month period.
- The market for personal loans must have changed significantly since you first took out the loan. So if interest rates have fallen considerably since then, the lender will make less money when it re-lends the money to someone else.
- Over and above points one and two, the lender must still demonstrate the penalty is fair and objectively justified.
You can read more about overpaying in Overpay your loan without penalty.
Do you need to borrow?
As I’ve said already, 5.8% is a great interest rate, but you should still ask yourself if you really need to borrow.
As I said only last week, the best option is to hold back and not borrow at all. If you take out a loan, some of your salary will go towards bank or building society profits whereas if you don’t borrow, you can spend all of your income on yourself. Either now or in the future.
But if you want to go ahead and borrow now, Derbyshire’s personal loan looks good.
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