The Return Of The Loan Arranger

If you're fed up with paying high rates of interest on credit and store cards, then a fixed-rate personal loan may save you money.

This article was first sent to Fools as part of our Afternoon email series.

Since October, the Bank of England has slashed its base rate four months in a row, reducing it from 5% to 1.5%, with more cuts likely. This takes the base rate to its lowest level in the Bank's 315-year history, so borrowing rates must be tumbling, right? Wrong, because the interest rates charged on unsecured (non-mortgage) debts are remarkably static.

Indeed, as banks seek to rebuild their shattered balance sheets, some rates have gone up, not down. Take, for example, personal loans, which allow you to borrow a fixed amount over a fixed period at a fixed rate. Until 2007, it was possible to find a personal loan with an interest rate of 1% or so above the base rate. But in today's new world of banking, despite the fact that the base rate is at a record-low of 1.5%, most personal loans charge at least 8% APR -- and even more to riskier applicants.

Better a loan than a card?

Nevertheless, even with loan rates higher than they were two years ago, they still look relatively attractive when compared to the sky-high rates charged by credit cards and store cards. For example, a typical credit card charges close to 18% APR on purchases and 25% APR for cash withdrawals (plus steep cash-withdrawal fees). Store cards are an even bigger rip-off, with interest rates even exceeding 30% APR.

What's more, I always warn against rolling up existing debts against your home, either by remortgaging or arranging a secured loan or second mortgage. If you get into difficulty with your monthly repayments, then your home could be seized by your lender. Having seen this happen far too often in the housing crash of the early Nineties, I am no fan of turning unsecured debts into home-threatening loans!

So, is there a kind of `third way' between expensive plastic debts and risky secured loans? Of course, those with excellent credit records can take their pick of 0% balance transfer deals. By shifting your debt to a 0% credit card, you can avoid interest for up to sixteen months, on payment of a transfer fee of around 3% of the transfer value.

However, card issuers are getting increasingly picky when it comes to accepting new customers. Indeed, some card firms routinely turn down more than half of all credit applications. Hence, this brings us back to personal loans as a `halfway house' between cheap mortgage debt and expensive card balances.

According to Fool.co.uk's independent, unbiased search engine, these are the cheapest unsecured personal loans currently available:

To borrow £5,000 over three years, without rip-off payment protection insurance

As you can see, the interest bill to borrow five grand over 36 months is between £602 and £679 for these five Best Buy loans, which is a fairly small gap. However, remember that these are `typical' APRs, which means that your individual rate could be higher or lower, depending on your suitability as a borrower. It's likely that only the very best applicants will get the very best rates - so you may want to check your credit rating before you apply, to avoid getting a rejection on your file.

Lastly, when choosing a personal loan, be sure to check for any hidden charges, such as arrangement fees, courier or payment-processing fees. To be on the safe side, study the small print before applying.

Top Tips:

1. When comparing loans, always check the total amount repayable (TAR), which shows you the true cost of credit, including interest and fees.

2. Beware of expensive payment protection insurance, which can bump up the cost of your loan by up to a third (33%).

3. Don't be tempted to borrow more than you need and can comfortably afford to repay. Smart borrowing means paying as little -- not as much -- interest as you can!

Find a low-rate personal loan at Fool.co.uk