After reading about how lender Everyday Loans is currently offering an unsecured personal loan with an eye-watering 59.6% APR*, I started thinking about just how expensive loans have become.
Last October, all the best buy loans were comfortably in the mid-6% APR range. Fast forward 11 short months and those same loans charge rates as high as 10.4%.
There are a number of reasons why this has happened, chief among them being the extremely volatile market conditions that have made banks jittery coupled with the fact that lenders have generally struggled to find sufficient cheap credit to offer to their customers.
What this means for the person on the street is that now is a fairly poor time to be borrowing money. If you needed any further proof of this, consider the following: Thirteen months ago, more than three quarters (78%) of unsecured personal loans carried an APR of less than 8% for £10,000 over five years. Today this has dropped by 52% to just 26%.
APR’s have sky-rocketed
The table below shows you what the best personal loans looked like in October last year and how these same deals look today.
The average APR on the seven best loan deals in October 2007 was a fairly impressive 6.6%, compared to 8.7% today – representing a 2.1% jump in the average APR. Put another way, this has added almost £500 to the total cost of a £10,000 four year loan.
What makes this sharp rise all the more dramatic is the fact that it has gathered pace as the months have passed.
According to price comparison site uSwitch, there were still six sub-7% loans available as recent as May this year. Over the next three months, all of these disappeared, with some hiked by as much as 1% in one go.
| Lender | Rate in October 2007 | Rate in September 2008 | Total increase |
| MoneyBack Bank | 6.5% | 7.8% | 1.3% |
| Sainsbury’s Bank | 6.5% | 7.9% | 1.4% |
| Bank of Scotland | 6.6% | 10.4% | 3.8% |
| Tesco | 6.6% | 7.9% | 1.3% |
| Halifax | 6.6% | 10.4% | 3.8% |
| Barclaycard | 6.8% | 8.4% | 1.6% |
| AA | 6.8% | 7.9% | 1.1% |
| Average | 6.6% | 8.7% | 2.1% |
Source: Oct 2007 figures - uSwitch.com
Take steps towards a better deal
While this is clearly a bad time to be borrowing money, the sad truth is many people won’t have the option of waiting until things improve before applying for a loan.
If you find yourself in this situation, it’s important you take steps to ensure you get the best possible deal. For starters, make sure you shop around, as your specific bank is unlikely to be the outright cheapest on the market. In fact, most high street banks can’t compete with the best loan providers out there.
If you are looking to borrow a small amount – maybe just a few thousand – see if you can find a 0% new purchase card with a high enough credit limit, and then switch between 0% balance transfers deals until your debt is paid off. This may be more effort, but it’s also a lot cheaper, especially considering most lenders charge dramatically higher rates on loan amounts smaller than £7,500.
Find the best deal you can
Finally, make sure you have an excellent credit rating, as this will also impact on the rate you are offered. Do these things and you still won’t get a rate as cheap as last year’s, but it will at least be affordable.
“The loans market is extremely volatile at the moment and best buy deals have become more expensive over the past 13 month,” says Simeon Linstead at uSwitch. “However, the market is vast and there are still competitive rates for those who take the time to compare the offers available.
“Online loan deals are typically lower than their offline counterparts and in times of volatility in the credit markets and banking world, borrowing on a fixed rate loan can offer borrowers the peace of mind that, both, their interest rate and monthly payments are fixed for the term of the loan.”
*Everyday Loan rate applies to customers with a poor credit history (customers with a good credit rating are offered a “bargain” 37.3% APR).
