Cheltenham
The Cheltonian > Articles

Lenders Slash Rates On Personal Loans

Lenders Create Healthy Competition In The Unsecured Loans Market crack

Four of Britain’s biggest financial institutions have shrugged off the gloom surrounding Britain’s economic prospects by slashing the rates on personal loans amid high inflation.

With inflation hitting 3.7%, and some City fund managers predicting three rate rises in 2011, it seems an unlikely moment for what moneysupermarket.com calls “a loan rate war”.

Tim Moss, head of loans and debt at the personal finance website, says: “With many consumers reviewing their finances, it is great to see providers creating some healthy competition in the unsecured loans market after a period of relative inactivity.”

The latest round of rate cuts began in December - with Sainsbury’s Finance quoting a lead-in 7.4% on loans of £7,500-£14,999.

Applicants need a Nectar card and are promised the ‘added benefit’ of double Nectar points on Sainsbury’s shopping and fuel for two years. Anyone spending £50 a week in store could get Nectar points worth an extra £52 per year.

M&S Money then trimmed its personal loan rate by nearly a quarter - down from 9.9% to 7.5%. Someone borrowing £12,500 over 60 months would pay £249.01 per month - a total of £14,940 over five years.

Also M&S borrowers can make no repayments for the first three months of the loan if they are struggling to balance other bills.

Santander then unveiled the “cheapest loan rate on the market in two years”: 7.3% on loans of more than £7,500 and a competitive 8.5% for loans over £5,000.

The offer is available to new customers who open a Santander current account - with a £100 incentive to switch and the promise of a 5% rate paid on credit balances in the new account.

Finally, Nationwide BS joined the fray - promising a typical 7.2% rate on £7,000-£14,999 advances, repayable up to five years. A £10,000 loan at 7.2% over 60 months will cost £11,873 to repay.

Applicants need a FlexAccount to get the lowest rate, but others can get a rate of 7.3% on £7,000-£14,999, for up to five years, by going through moneysupermarket.com.

One attraction of personal loans in an uncertain economic climate is the promise that monthly repayments won’t change from the figure agreed when the loan is taken out.

With wage rises in many sectors likely to be small or non-existent for the next couple of years, it is crazy to take out a personal loan now without that guarantee in place.

But Andrew Hagger, at Moneynet.co.uk, says not all the new offers tabled are as generous as they seem.

“Unfortunately, rates have not been generally discounted for loans in the £2,000-£3,000 range, which is what people often need when they are under pressure to balance the books”, he says.

“Many of these remain in double-figure percentages, some at nearly 20%.”

For a £3,000 loan, Moneynet lists the Post Office (13.9%) among its best buys, after Sainsbury’s Finance at 12.8%.

Hagger adds: “You also need a pretty good credit rating to get the headline low rates. One blemish on the record and you are likely to pay more.”

When the Consumer Credit Directive (CCD), driven by the EU, takes effect, lenders will be legally obliged to offer the headline rate advertised on a loan to only 51% of applicants, against the previous two thirds (66.66%). Others can be charged more, according to their risk profile.

Hagger also points out that when personal loan rates went this low before, many lenders were raking in huge profits by selling PPI (payment protection insurance) and using some of this money to subsidise the loan.

Now loan providers can’t sell PPI at the same time - so lower loan rates should leave a bigger dent in their profits this time around.

Nationwide BS spokesman Mike Pitcher thinks personal loans could be particularly attractive to many who ‘maxed out’ credit cards: Although the current rate for new credit card applicants is 18.3%, many existing card holders are paying 20%-plus on outstanding balances - while some store cards charge nearly 30%.

Statistics from Nationwide BS indicate that of 22,000 personal loans made in November 2010, slightly more than 6,600 were used as consolidation loans to pay off loans from various sources. New cars are another major use for personal loans, with the next spike in demand likely in April 2011.

Hagger also thinks consumers who have seriously overspent can bring greater financial discipline to their affairs if they replace several card debts with a personal loan.

He says: “Besides the attraction of getting their hands on cheaper money, consumers who might be balancing a tight budget with payments to several card companies each month will see just one payment going out on a personal loan.”

“And they can also see the loan is being gradually paid off according to a pre-arranged timetable, while there is always the risk with cards of borrowing rising again if a few bills come in from unexpected sources.”

For millions of households, the next couple of years could trigger severe pressure on family finances. As the CCD looms over the sector, Tim Moss sees a case for rapid action.

“Be sure to understand your credit file before you apply. Those with less-than-perfect credit histories are more likely to receive higher rates, so understanding your credit file will be more important than ever.”