Make sure you your homework to land the best personal loan deal
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Written by: Kate Tee
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Date: Sun, 7 Feb 2010 |
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The Bank of England Base Rate may have remained frozen at an all-time low of 0.5 per cent since March, but loan rates have continued to head upwards - making the gap between the base rate and the average loan rate bigger than ever.
A large number of unsecured loan providers have hiked up their rates over that period, and while most have introduced increases of up to 1 per cent, some have increased rates by as much as 2 per cent.
This is worrying news for those already struggling to manage their debts, as these "tweaks" in pricing will add hundreds of pounds in interest on a typical loan.
Stricter lending criteria
Not only are loan rates rising, but lenders are also continuing to tighten their lending criteria.
Rising unemployment has meant the risk of customers defaulting on unsecured loans has increased, so providers are therefore only accepting customers with blemish-free records.
This means that those lucky individuals who do get their application accepted are then having to pay a higher price - essentially to cover the defaulting customers who took out loans previously at more competitive rates.
Further hikes going forward
And the bad news for those looking to take out a personal loan is that the upward trend in rates looks set to continue - making it more important than ever to do your homework when searching for the best deal.
That said, if you do have a clean credit history, there are still some decent deals up for grabs: for a loan of between £7,500 and £15,000 over five years, Alliance & Leicester and Tesco are both offering a rate of 8 per cent, while Halifax has a rate of 8.1 per cent.*
Rewards for loyalty
It's also worth noting that while with most financial products, providers reserve their best deals for brand new customers, it's a very different story in the personal loans market where the best deals are currently being offered to existing customers.
In short, with consumers struggling to make ends meet, loan providers are looking to offer the best rates to those whose financial behaviour they can closely inspect.
Nationwide building society, for example, is offering a rate of 7.9 per cent for loans between £7,500 and £14,999 for customers who already hold one of its current accounts.
Elsewhere, Sainsbury's Finance is currently offering a rate of 8 per cent on loans between £7,500 and £15,000 to Sainsbury's shoppers who apply online with a Nectar card.
Rate for risk
If you are planning on applying for a loan, you need to be aware that although a provider is advertising an enticing rate of interest, the deal that you are actually offered may not be as competitive
This is because most lenders advertise the "typical rate," but are legally only obliged to accept 66 per cent of applicants at that rate. The practice - known as "risk-based pricing" - means the rate you are offered could be considerably higher.
Be cautious with credit searches
The only way to find out the actual rate the lender will offer you is by applying individually to that lender.
However, you need to be cautious about submitting too many applications to compare quotes, as every time you apply for a loan, a footprint is left on your credit record - which in turn affects your credit score.
This footprint is visible to any other credit providers and lenders who will then use this information when making their own credit decision.
If you are shopping around for a good deal, you might be temped to submit multiple applications, but if you are deemed to have had too many searches, you may well be declined - or could get charged a much higher rate of interest.
Investigation
The good news is, the Treasury Select Committee is currently investigating how credit searches can impact on consumer credit ratings.
The inquiry, launched at the end of September, will probe the "anti-shopping around" nature of credit searches - and will hopefully mean that consumers are no longer penalised for doing their research.
This could also lead to a wider availability of "quotation searches" which do not leave a footprint on your credit history if you decide against taking the loan.
* Confused.com 28 Oct '09
All other rates correct as of 28 Oct '09
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