PERSONAL loan costs are now close to record lows for those borrowing five-figure sums after several rate cuts in recent weeks. All is not what it seems, however, with some lenders charging 20 per cent APR plus to customers who only want a loan of £5,000 or less.
The battle for personal loan business is as intense as it’s ever been, but the problem is that many lenders are cherrypicking and concentrating on the higher value end of the market.
Rates are very competitive if you want to borrow £7,500 or £10,000, with five lenders currently fighting to be top dog and advertising representative interest rates of between 5.6 and 5.9 per cent APR.
For lower value loans it’s a very different story, with the majority of lenders charging double digit rates on a £3,000 advance. Royal Bank of Scotland/NatWest and Bank of Scotland/Halifax are among the most expensive at 20.9 and 24.9 per cent APR respectively.
There are cheaper options available, but my research shows that you’d do well to steer clear of the established providers if you want get the best deals. There are three borrowing options that stand out, if you want to borrow £5,000 or less, as follows:
Zopa, the first peer-to-peer lender in the UK, and RateSetter one of the newer lenders in the peer-to-peer market, both offer some of the best value deals at 9.5 and 9.7 per cent APR respectively for a £3,000 loan over three years.
Just because you’re not familiar with the names doesn’t mean you should discount them – the peer-to-peer market has quickly established itself as a credible alternative to the big banks – and the low interest rates are much better than you’ll find on the high street. Zopa has already lent more than £230 million and RateSetter has advanced more than £36m to personal customers since launch.
Another option to consider is the Rate for Life card from MBNA. This isn’t strictly a personal loan, but there’s nothing to stop you using this long-term fixed rate credit card in the same way you would a loan.
If you transfer your balance to the card and set up a monthly standing order for your current account, it works exactly the same as a personal loan. The interest rate is 5.9 per cent APR for as long as it takes you to clear the balance and even including the one off 1.5 per cent balance transfer fee, it remains one of the cheapest ways to borrow a smaller sum over three or five years.
The potential cost savings on a loan of £3,000 with the low rate options mentioned here could save you up to £22.79 per month and as much as £821 in total over a three year term when compared with the personal loan with Bank of Scotland, charging 23.9 per cent APR.
For £3,000 over five years the cost savings are even greater at up to £24.88 per month and more than £1,400 over the full term.
Don’t just sign up with you own bank without looking at all the alternatives, as you could be paying way over the odds and end up out of pocket.
Shop around for the lowest rate, as there are some cheaper options out there and by thinking outside the box or taking advantage of deals from new lenders you can save a small fortune in interest charges.
• Andrew Hagger is a personal finance expert at {www.moneycomms.co.uk|www.moneycomms.co.uk|www.moneycomms.co.uk}