Loan rates increase year-on-year – what other borrowing options are available?

Consumers looking to take out a small loan to help them cope with unexpected financial costs during these uncertain times will find that average loan rates on modest sums have increased year-on-year.

Data in the latest Moneyfacts UK Credit Card Trends Treasury Report shows that the average loan rate on sums of £5,000 to be repaid over three years has risen by 0.3% year-on-year, from 6.8% in March 2019 to 7.1% in March 2020.

In addition to this, at a time when many consumers are worried about their finances, it could be better off for borrowers to hunt around and consider a less familiar name when choosing a loan, as the data from the report found that high street providers on average charge 1.1% more for a loan of £5,000. High street providers offering loans of £5,000 over three years charge an average of 7.8%, while other providers charge an average of 6.7% on the same sum and repayment term.

Unsecured personal loan market analysis 

Source: Moneyfacts Treasury Reports 

Commenting on the increase in unsecured personal loan rates, Eleanor Williams, finance expert at Moneyfactscompare.co.uk, said: “Considering the current economic conditions, it is important that prospective borrowers keep a close eye on the market, as unsecured personal loans are priced based on risk. As we saw during the financial crisis in 2008, loan rates can increase quickly when there is a spike in risk. These loans are not tied to someone’s home, like a mortgage would be, so lenders would have no security should a consumer default.

“It may take a few months for the market to adjust to any external influences, but consumers can still find competitive rates – although they are starting to rise. If borrowers are keen to apply, speed is crucial. As with any debt, it is vital that consumers ensure they are able to keep up with repayments regardless of any changes to circumstances.”

For those looking to borrow a sum of £5,000, a 0% purchase credit card could be a better option. For example, the longest interest-free period on a dual 0% purchase and transfer credit card is 27 months. Sainsbury’s Bank offers this interest-free period on its Dual Offer Credit Card Mastercard, which would mean borrowers would have to make an average monthly repayment of £186 over 27 months to repay the debt within the interest-free period. Alternatively, the cheapest £5,000 loan to be repaid over a period of 27 months comes from Tesco Bank. Its Telephone Personal Loan charges a rate of 3.4% APR, which would result in monthly repayments of £192.51.

While a credit card might be a cheaper option, borrowers should be aware that approval for a credit card is dependent on credit scores, so those with a low credit score might struggle to get the best interest-free deals. In addition to this, the rates advertised on loans are also dependent on credit scores, so again those with a low credit score might be offered a higher rate than that being promoted.