The cost of personal loans is rising constantly as the credit crunch takes hold, and the trend could continue well into the New Year.
That means customers looking to take out a loan may need to act sooner rather than later to avoid paying a higher premium. But with lenders changing their rates almost daily, how do you know where to look?
We take an updated look at the personal loans market to see where the best – and worst – deals lie.
Compare Personal LoansWhat’s pushing prices up?The problem is that lenders are struggling to get hold of the cheap credit they need to offer competitive loans, and as a result are having to raise their interest rates to maintain profit margins.
And we’re not talking small amounts, either: Marks & Spencer increased its loan rates by a whopping 20% (from 7.4% to 8.9%), while Northern Rock also hiked its rates by a similar amount.
Of course the constant price hikes have led to a decrease in the number of people looking to take out loans, creating a dangerous cycle whereby the less products lenders sell, the more they charge for each they do.
Compare Personal Loans hereWhen it rains, it pours The situation has become so dire that some lenders have decided it’s no longer worth their while. Leeds Building Society, GE Money and (most recently) Liverpool Victoria have all announced their departure from the personal loans space, and more are expected to follow suit as the market continues to stagnate.
Less competition is always a bad thing for the consumer, and it seems things may get much, much worse before they get better: The Competition Commission is due to announce the findings of its investigation into Payment Protection Insurance, a racket which earns lenders over £4 billion a year.
Should we see a crackdown on the controversial insurance early next year, lenders will no doubt look to recoup their losses by further hiking the cost of their loans.
Compare Personal LoansStill good deals (for now)The good news is there are some decent rates out there.
Tesco Finance leads the way with its 6.6% rate, followed closely by
Your Personal Loan (6.7%) and
MoneyBack Bank (6.7%).
The problem is these deals may not last long – Your Personal Loans rate stood at 6.3% in October, while MoneyBack bank has upped its rates twice in the last two months. So if you do need a loan, you should probably act fast rather than waiting to see if something better comes along.
Click here to compare Personal LoansWarning: Rates can be misleadingLenders can be downright sneaky at times. They know well that most borrowers will choose a loan based on whoever charges them the lowest interest. As a result, some lenders have taken to manipulating the way their rates are calculated so that, although it appears lower, the total cost is actually higher.
As a good example of this, Sainsbury’s Bank advertises its loans at 6.5%, so it sounds cheaper than both MoneyBack and Your Personal Loan, which charge a 6.7% rate.
But as the table below shows, Sainsbury’s total loan cost is actually some £90 higher. So when you’re shopping around for the best quote make sure you factor in the total cost of the loan, rather than base it on rates alone.
Prices as for a £10,000 loan over four years
Smaller loans are more expensiveAnother trick lenders will use to make more money is to charge a significantly higher rate of interest for smaller loans. If your loan amount is above £7,500 you should be fine, but the further you go below that the lower your chance of getting the advertised rate.
To illustrate this point, we again got quotes from various lenders but this time for a £5,000 loan. As the table shows, the difference varies widely depending on which lender you go to, but you could be charged interest at up to 4.5% higher.
Get an interest free loanIf you are in the market for a smaller loan, you will save yourself a bundle by applying for a credit card offering a lengthy interest free period on new purchases and putting your debt on that instead.
The Halifax Purchase card is probably the best bet for this, offering 15 months interest free, reverting to a 14.9% APR thereafter. If you can’t pay it off within that time frame, simply switch the debt to a card offering an interest free window on balance transfers, such as the Virgin Mastercard which features a 15 month grace period.
Compare new purchase credit cards here
