Personal loans are getting more expensive, but can you still get a decent deal?
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If you need to borrow money this summer, you'll be dismayed to hear that interest rates for personal loans are rising again.
But this is hardly surprising. In these credit-crunched times, all types of borrowing have become more costly, including mortgages and credit cards. Unfortunately, personal loans are no different.
In fact, Fool partner Moneyfacts recently reported that 14 lenders increased some -- or all -- personal loan rates in July, with the AA and Tesco Personal Finance upping rates twice.
Abbey was the worst culprit increasing rates by a whopping 5% for loans below £4,950, taking the typical APR to a pricey 12.9%.
But, thankfully, it's not all bad news.
One lender, in particular, is dancing to its own tune -- Moneyback Bank. The lender has bucked the trend and cut its loan rates by 0.2%, while just about everyone else is raising theirs. Moneyback Bank is now one of the market-leaders, offering a low typical APR of 7.6% on loans of £5,000 to £15,000.
That said it's a different story for larger loans. The lender has just increased the APR from 7.6% to 8.6% for loans of £15,001 to £20,000, suggesting that the best deals may not be around for long. My advice is to act quickly.
The best loans you can get
So, despite the credit crunch, can you still get a decent deal on a personal loan? Let's take a look at the three best-buys:
Best-buy loans (£10,000 repaid over five years)
Lender | Typical APR | Total amount repayable | Monthly repayment | Early repayment penalties |
|---|---|---|---|---|
Your personal loan.co.uk | 7.3% | £11,899.80 | £198.33 | Yes - 1 month's interest |
ASDA | 7.4% | £11,926.20 | £198.77 | Yes - 2 month's interest |
7.6% | £11,979.60 | £199.66 | Yes - 1 month's interest |
As this table shows, the most competitive loan available today is offered by Your personal loan.co.uk (provided by Co-op Bank). This loan has the lowest rate today, at 7.3% APR, and more importantly, it also has the lowest TAR (total amount repayable). The TAR shows the total cost of the loan including any fees. So it is the TAR and not the APR you should look at when deciding which loan to go for.
Although Your personalloan.co.uk is the frontrunner, Fools tells us that getting accepted for the loan is no mean feat, so it may be better to go elsewhere if you don't have a perfect credit history.
So what should you look out for in a personal loan?
Early repayment charges
In an ideal world, it would be sensible to go for a loan that doesn't deduct early repayment charges, so that you are allowed pay off your loan early and reduce the amount of money you pay out in interest. Unfortunately, this is an inescapable feature of all the three best-buy loans mentioned above. The charges range from one to two months' interest depending on which lender you go to.
If there's a good chance you will pay your loan off early, you might be better off with a lender that won't penalise you for doing so. Try the Post Office which offers the lowest rate of 7.9% APR (for the same £10,000 loan), but won't sting you if you get out early.
Payment protection insurance (PPI)
I'm sure you must be well aware of the dangers of Payment Protection Insurance (PPI) by now, so I'll just give you a quick reminder. When you apply for the loan the lender will probably try to sell you PPI alongside your loan. The PPI policy will meet your repayments for you if you can't pay them because of accident, sickness or employment.
PPI might sound like a Foolish idea, but it is usually ridiculously over-priced and it can seriously hike up the cost of your loan. If you really want PPI, it's usually much cheaper to buy a policy from an independent provider, rather than the lender. You could try British Insurance for a good quality policy.
Repayment holidays
Repayment holidays allow you to take a break from paying your loan, usually for three months. You may think this is a good idea, but think again. You'll have to make up for lost time by increasing your monthly repayments to keep within the original term of the loan or by extending it, so it takes longer to pay it off. Either way it means a higher interest bill overall.
Consolidation loans
Borrowers often take out personal loans to consolidate all their debts into one place. Again this seems pretty sensible, but once you've rolled your borrowings up into one loan, it's often tempting to run up further debts elsewhere. Don't fall into this trap.
Tiered rates
Sometimes there are anomalies in the personal loans market that actually make it cheaper to borrow a little more. Look for tiered rates where larger loans are charged at lower rates than smaller ones. Abbey is a good example. The lender charges 12.9% on loans below £5,000 but only 7.9% on loans of £5,000 or more. So if you want to borrow £4,999 over a three year term, you would actually pay £423 less by borrowing £5,000 instead!
So these are my top tips for getting a great personal loan. All you need to do now is visit The Fool's Loans Centre.
More: Last Of The Low Rate Loans | Visit The Motley Fool Loans Centre