Emma Lunn, Thursday May 15, 2008
Personal loan rates are starting to climb sharply. But where can you still find the cheapest deals and how can you maximise your chances of getting the best deal? We take a look
Despite interest rates falling so far this year, personal loan rates are starting to climb. The past two weeks have seen several major lenders including Nationwide, NatWest, Tesco, Lombard Direct, Barclaycard and the AA all up their rates.
Rates on personal loans offered by Nationwide are now higher than the building society's credit cards. At the beginning of May, Nationwide raised its rates by up to 1%, leaving the rate on its £1,000 to £3,000 loan at 17.4% - 1.5 percentage points higher than the rate on its credit card.
Traditionally credit cards have been a more expensive way of borrowing than loans, but the price hikes a sign that institutions are starting to view loans to be as risky as credit card debt.
According to website Moneyfacts, more than half of lenders offering personal loans have made changes to their rates since the beginning of the year. It says that anyone who now takes out a £5,000 personal loan over three years will find themselves paying up to £386 more than if they had taken out the same loan at the same time last year.
Disappearing loans
As well as rates increasing, some lenders have dropped out of the loan market altogether.
Eskimo Loans, GE Money and Goldfish have all exited the loan market in the past four months.
"Lenders also seem to be clamping down on those who borrow more," says Samantha Owens, head of personal finance at Moneyfacts. "Traditionally the more you borrow on a personal loan the lower the APR. More recently however, we have seen lenders increasing the rate offered on the higher loans."
"This change is another way lenders are tightening up, ensuring that we only borrow as much as we need, not a penny more". The past year has also seen lenders reassessing how they offer personal loans, with more and more lenders adopting "personal pricing" or a credit rating assessment.
This means that loan companies provide a personalised rate for each loan applicant based on their credit rating and personal circumstances. This is different to the normal practise of offering a "typical rate" - an advertised APR at that at least 66% of applicants would be accepted for.
Although personal pricing can make it tricky to compare loans, it is not necessarily bad news for borrowers. Whereas before a prospective borrower was either accepted or declined, now those lenders that offer an APR dependent on a credit rating will offer an alternative rate to those borrowers who otherwise could have been declined.
On a positive note, some lenders have bucked the trend and reduced rates in the last few months. Moneyback Bank, Britannia Building Society, Yorkshire Bank and Clydesdale Bank have all reduced selected rates since the beginning of the year.
If you need a personal loan it is a good idea to shop around to make sure you get a good deal, but bear in mind that the best rates will be reserved for people with tip-top credit ratings. Best buys at the moment for borrowing £10,000 over five years include yourpersonalloan.co.uk at 6.9%, and Moneyback Bank and Sainsbury's Bank at 7.3%. For loans of £5,000 repayable over a three-year period, yourpersonalloan.co.uk charges 6.9%, Barclaycard 7.3% and the Post Office 7.9%.
