Loans News

Derin Clark

Derin Clark

Online Reporter
Published: 21/03/2019

Today there have been a number of notable changes to personal loan rates, with both reductions and increases seen across a number of brands. This includes Clydesdale and Yorkshire Banks, both of which increased rates but still remain highly competitive in the market, while Tesco Bank has reduced the rate in the £25,001 to £35,000 tier for one to five years, making borrowing at this level much more affordable.

First up, Clydesdale Bank increased the rate on its personal loan of £5,000 for a term of 36 months to 3.5% APR, which despite the increase still remains one of the most competitive short-term personal loans available and holds second place in our Best Buy personal loan chart for this tier. This same loan and rate is also available from Yorkshire Bank.

Another major change in the personal loans market today came from Tesco Bank, which reduced the rate on its £25,001 to £35,000 tier loan to 6.7% APR for a term of one to five years. This loan allows overpayments without incurring an early repayment charge, which may prove useful to borrowers who find they're able to pay more than they initially thought.

The personal loans market remains highly competitive all round at the moment, with the best deal available coming from M&S Bank offering a rate of 2.8% APR on a loan of £7,500 for 36 months. Meanwhile, Admiral is currently topping many of our personal loan Best Buy charts, including the £5,000 for three years chart with a rate of 3.4% APR, as well as our £7,500 for five years chart and £10,000 for five years charts with a rate of 2.9% APR on offer for both.

It's important to remember that rates will always depend on your
credit rating and personal circumstances, so make sure your credit score is up to scratch if you want to stand the best possible chance of securing the advertised rates.

What next?

Use our loan calculator to find the right deal for your needs.

Three in five (60%) of British borrowers admit that they are unaware of the interest rate being charged on their loan, research by Mintel has revealed. Given that 61% of adults owe money on a loan or credit product – credit cards (37%), current account overdrafts (16%) and personal loans (12%) being the most popular – this means a worrying number of people could be in the dark, and potentially paying over the odds in the process.

The research also showed that although 58% of consumers spent time trying to find the best deal possible when they took out their last unsecured loan, 48% of consumers said that it is more important to be accepted for the loan than the rate of interest charged.

This could prove to be a false economy, as a higher interest rate means higher repayments – which can have a significant impact on monthly budgets. It's of course vital to be as confident as possible that you'll be accepted for a loan, but the best way to do that is to ensure your credit rating is up to scratch.

You'll want to start by checking your score with a credit check provider – some, such as Experian, offer trials that allow you to access your credit report for free – and noting where any improvements can be made. Not only can this give you the best possible chance of being accepted for a loan, but the better your credit score the better your loan rate is likely to be, resulting in lower repayments in the process.

Find the best loan rate

Using online comparison charts such as the Moneyfacts.co.uk loan and credit card Best Buys often provide consumers with an easy way of shopping around and seeing what the best available rates are without commitment. According to the research carried out by Mintel, arranging loans online was more popular with consumers than using offline methods, with 56% of borrowers arranging their last loan online compared to the 40% who steered clear of the computer screen.

Sam Marks, financial services analyst at Mintel, said: "The fact that so many borrowers don't know the interest rate they're paying on their loan suggests that many Brits simply opt for the most convenient option, rather than shopping around. Half of consumers say they didn't consider other ways of borrowing when taking out their last personal loan, which suggests that many don't have the time to consider all of the options open to them.

"The market is still heavily reliant on cross-selling as most consumers resort to checking rates with their main current account provider. However, price comparison websites and the rise of soft-searches have given consumers a wider array of lenders to choose from and this has increased transparency in this market."

What next?

Find the right deal for you by using our loan calculator

UK borrowers could be paying as much as two-and-a-half times the headline APR advertised by some personal loan lenders, leading to an estimated £194m extra being paid by borrowers each year, according to new analysis conducted by the Centre for Economics and Business Research (Cebr) on behalf of Shawbrook Bank.

The analysis shows that the average representative APR advertised by UK lenders for a typical loan value of £9,000 ranges from just 2.8% to 5.5%, but the average APR paid by borrowers for a fixed rate personal loan is 7.0%, which is an increase of up to 150%.

chart-showing-double

Narrowing gap

Although the gap between the interest rates being advertised by lenders and the interest rates being paid by consumers has widened significantly over the past 10 years, this difference has narrowed marginally over the past 12 months.

The narrowing of the gap reflects the slowdown in consumer credit growth that has taken place in recent months. The latest figures from the Bank of England reveal in November 2018, the UK's annual rate of credit growth dropped to its slowest rate since March 2015.

"The gap between consumers' expectation and reality when it comes to the cost of personal loans continues to be fuelled by the practice of 'teaser pricing'. The lack of transparency surrounding the loan application process is not only confusing to some consumers but in certain cases could be costing them money," said Paul Went, managing director, Consumer at Shawbrook Bank. "Collectively, households in the UK are paying millions of pounds more in loan servicing costs than initially expected. The disparity between representative APRs advertised by lenders and the APR actually paid by borrowers shows no sign of relenting and consumers should be wary of this when applying for a loan."

How to find the best deal

When determining how much interest to charge borrowers, a lender will look at a number of different factors, including the borrower's credit rating. To help find the best deal, here are some tips borrowers could consider:

  1. Know your credit score – it is important to know what your credit score is before applying as this should determine which provider you approach and give you an indication of your likelihood of being accepted for a loan.
  2. Understand the process – spend some time researching what factors lenders take into consideration when reviewing your application, and what you need to get the best rate. This is important as rules require the advertised headline rate to reflect the rate received by at least 51% of applicants.
  3. Find the best rate for you – the top advertised rates aren't necessarily the best deal for you. Shop around to find which lender is likely to give you the best rate – don't presume this will be your bank.
  4. Don't forget a soft search – by using a price comparison website you can search for, and compare, the best rates currently on the market, helping you to make a more informed decision about the loan that is best for you.
  5. Borrow within your means – don't use advertised rates to decide on how much you can afford to borrow. Decide what your limit is and how much you can afford to repay each month before applying. Don't be tempted to borrow more than you can afford simply because you've been offered a higher amount.
  6. Pay down existing debt – it's also a good idea to pay off existing debt where possible before applying for a new loan. This is could increase your chances of being accepted and ensure you don't end up paying a higher APR.

Those looking to consolidate their debts – or perhaps recover from the spending frenzy of the festive period – may be disappointed to learn that average loan rates are beginning to rise. Indeed, our latest data shows that rates have increased on all tiers from £2,000 to £25,000 during the last quarter – so much so that the £7,500 tier has hit its highest point in two years.

The figures, taken from the latest Moneyfacts UK Treasury Report (Unsecured Personal Loans, Credit Cards and Overdrafts), highlight the general uptick across the market. The average rate for a £5,000 loan over three years, for example, has risen from 6.7% APR in October to 6.8% APR today, while an average loan of £7,500 over five years will now charge 4.8% (up from 4.6%), and a £25,000 loan over the same period has an average rate of 5%, up 0.1% during the quarter.

"Gone are the record-low rates of unsecured personal loans, as rates have moved in an upward trajectory during the past quarter across the majority of tiers," said Rachel Springall, finance expert at Moneyfacts. "For example, the average rate of a £7,500 loan over five years – the tier most typically advertised – has hit its highest level since 2016, standing at 4.8% this month."

But why could rates now be on the up? Lots of it could be due to external factors, with the risk of economic uncertainty likely putting pressure on providers to rethink their pricing. "Loan rates were pushed to their lowest levels in 2017, so it was only a matter of time before external factors crept in to stir up the market," explained Rachel.

Unfortunately, it hasn't come at a great time for consumers. After all, we're coming to the time of year when consumers face a rise in household expenses, and many could be looking to consolidate their debts in the New Year as a result. It's also worth pointing out that only 51% of successful applicants need to be offered the advertised APR, which means the rate seen at first glance is not guaranteed to be the rate offered to customers when they apply – which means actual rates for nearly half of applicants could already be higher.

That said, although rates are on the rise, "there are still some good deals to be had within the Best Buys, so borrowers thinking about consolidating their debts shouldn't be too disheartened," concluded Rachel. "For example, cahoot currently offers the lowest loan rate of 2.8% on £7,500 borrowing over five years, but there is no telling how soon the lowest deals could breach 3% going into 2019."

This means that, if you're already thinking of taking out a loan, now might be a good time to take the plunge – before rates have a chance to rise any more. Just make sure you can comfortably afford the repayments and always ensure your credit score is up to scratch before you apply, and use our loan calculator to find the best deals for your needs.

With this month's rise in base rate, borrowers are surely braced for a torrent of rate increases. However, the cost of personal loans has been decreasing over the last five years, despite there having been only one base rate cut, compared to two rate rises.

Loan rates lower

This is according to our latest research, which suggests that lenders have been slashing rates to try and outcompete the market-leaders. This is great news for borrowers, who can benefit from a 3.9% decrease in the average rate on a £5,000 loan since 2013, with the loan rate now sitting at 6.8%.

In monetary terms, this means those borrowers taking out a £5,000 loan five years ago would have ended up paying about £300 more than someone getting a loan with the average rate today. And, as you can see in the table below, this isn't the only unsecured loan tier that has seen a benefit.

Average loan rates (tier) Aug-13 Aug-16 Aug-17 Aug-18
£3,000 17.3% 15.3% 15.3% 14.5%
£5,000 10.7% 7.7% 7.2% 6.8%
£7,500 6.8% 5.2% 4.7% 4.7%
£10,000 6.6% 5.1% 4.6% 4.6%
Source: Moneyfacts.co.uk

"Lenders have been vigorously repricing their loans to grab the attention of prospective borrowers, which is great news for those looking for a loan, at a time when other household outgoings may be set to rise," said Rachel Springall, finance expert at Moneyfacts.co.uk. As a result, it's currently cheaper to take out a loan than to put costs on a standard credit card.

Loan versus card

"A borrower who has amassed debts of £5,000 and is being charged 18.9% on a typical credit card, repaying £180 every month over three years, would save £1,195.44 in interest if they opted for the lowest loan charging 3.3% today from Sainsbury's Bank," Rachel explains. This means such a loan could be the most cost-effective way for someone to get out of debt, provided they can make their repayments every month without fail.

Of course, if you have a smaller amount of debt or manage to get a 0% balance transfer credit card with a decent introductory term, this may prove even cheaper. However, as Rachel points out, "many of the longest interest-free deals have faced scrutiny over the past six months. As a result, borrowers now get five months less to repay the debt interest-free than in August 2017, based on the longest deal without an annual card fee."

Just don't forget about balance transfer fee, either. "Today, the longest interest-free deal covers a three-year period, with a £74.70 balance transfer fee on a £3,000 debt from MBNA," found Rachel. That said, compared to the lowest loan rate available at the moment on a £3,000 loan, which is 5.9% APR from Metro Bank, borrowers could save £198.42 if they manage to get the current best balance transfer card.

The real benefit of a personal loan, as Rachel explains, is that your debt "would be cleared [thanks to having] a set repayment plan, unlike with a credit card, where borrowers could have set a minimum repayment as default." The latter means that the provider only charges you a percentage of the debt each month, which could see it take that much longer to pay everything back – even longer than any interest-free period, if you're not careful.

Loan considerations

While a credit card may compete with a loan when it comes to smaller debt, larger amounts will likely see an unsecured loan come out on top. That's not only because credit cards have lower limits, but also because, as Rachel says: "Lenders are advertising headline-grabbing loan rates, but these typically focus on loans of £7,500 or more".

Whatever you need, always remember that the rate advertised by the lender isn't guaranteed; it only has to be offered to 51% of successful applicants. That's why it's so important to make sure your credit rating is as good as it can be before you apply.

Also keep in mind that "there is no telling how long lenders can sustain the current rates, with economic challenges in the market that could impact the providers offering these cheap deals," Rachel concludes. "With this in mind, borrowers thinking about applying for a loan would be wise to check out the latest Best Buys while they remain competitive, so as not to miss out."

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