Credit cards Updated:
Once upon a time, if you wanted to borrow a small amount of money at a competitive rate, small personal loans would have been your first port of call. But that all changed when 0% credit cards came into the mix, and it doesn't look like there will be a reversal of fortune any time soon.
Tesco Bank is the latest to increase its offering, having just announced the launch of its 32 month 0% balance transfer credit card. It joins the ever-increasing number of providers that edge closer to offering what is, to all intents and purposes, a three-year interest-free loan, with the longest balance transfer term currently on the market being a whopping 33 months.
Small personal loans, on the other hand, are not only very expensive in comparison to many credit card deals but also when compared to larger personal loans, with it tending to follow that the smaller the loan, the higher the rate.
Sylvia Waycot, editor at Moneyfacts.co.uk, commented:
"Not so long ago, eyebrows would have been raised if a credit card offered a 0% balance transfer period of 30 months or more, but these days, whilst not the norm, it has become more commonplace.
"Meanwhile, small personal loans stubbornly stick to the astronomical rates of 2008. Moneyfacts records show that in July 2008, when BoE base rate was 5%, a £3,000 personal loan would have cost 16.1% in interest – and today it still costs 16.1%.
"The market for small personal loans seems to have lost its appetite for lending over the last few years and is still not showing any desire to lower rates. In addition, lenders have begun to raise their minimum advances, which has meant that anyone looking for a traditional small loan has fewer places to go regardless of how exemplary their credit history."
So what does it mean for consumers? Well, it means that times are definitely changing. In the past, if anyone was thinking of consolidating debt, the recommended action was to take a personal loan – but today a credit card debt (which could even have been a one-off purchase) of £5,000 can be transferred for a small setting-up fee and no interest charges for up to 33 months.
And the savings can quickly add up, potentially to the tune of hundreds of pounds. "Today the savings that can be made by balance transferring can, in some cases, be as much as a quarter of the loan value," explained Ms Waycot. "For instance, if you transferred £2,000 over the 33 months it would just cost you the BT fee of 2.99%, which is £59.80. The same £2,000 as a personal loan at an actual rate of 19.9% would cost £559.81, giving you a total saving of £500."
Given the savings, it makes a lot of sense to consider balance transfer credit cards instead of personal loans. You could make the necessary purchases on a separate card and then transfer it over to take advantage of the 0% deal, giving you plenty of time to pay it off without incurring any interest whatsoever.
As long as you're sensible – i.e. don't use the balance transfer card for further spending and work out how much you need to repay each month to clear your debt by the end of the term – it could prove to be a highly cost-effective decision.
It looks like the days of small personal loans could be coming to an end. Providers don't seem to be vying for our custom and are instead concentrating on offering better rates at higher loan amounts, and with credit cards often being the better deal there are fewer reasons to consider them. As Ms Waycot concludes: "We could be witnessing the end of the traditional small personal loan market, but loan providers seem unconcerned. Maybe that is because that is what they are quietly striving for?"
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