With the economic uncertainty brought on by the Coronavirus pandemic, many consumers have been looking at consolidating their debt to help get a hold of their personal finances. Research carried out by Moneyfacts.co.uk has found that not only is it becoming more expensive for consumers to take out personal loans, but many are finding that their loan applications are being declined or held up for long periods of time.
Despite the Bank of England cutting interest rates to 0.10%, meaning it is now cheaper to lend money than ever before, the average rate on personal loans of £5,000 over three years has increased from 7.1% in January 2020 to 7.4% in June. Personal loans to a value of £7,500 payable over five years have decreased by 0.1%, from 4.6% in January to 4.5% in June. Meanwhile, personal loans at £10,000 payable over five years have remained at 4.5%. “If borrowers are thinking about applying for an unsecured personal loan, then they may wish to check deals now, as it is becoming more expensive to consolidate debts,” explained Rachel Springall, finance expert at Moneyfacts.co.uk. “One such rise was on the Nectar loan offered by Sainsbury’s Bank, increasing by a substantial 3.3% APR, to 6.9% APR (previously 3.6% APR) for loans of between £5,000 and £7,499 for a term of one to five years. This change resulted in the loan falling out of the top rate tables and at a rate of 6.9%, this is currently double the rate of the market leader for this loan amount from Tesco Bank at 3.4% APR. This shows how important it is for borrowers to shop around.”
|Unsecured personal loan market analysis|
|Average loan rate (by tier)||January 2020||March 2020||May 2020||June 2020|
|£5,000 over three years||7.1%||7.1%||7.3%||7.4%|
|£7,500 over five years||4.6%||4.6%||4.4%||4.5%|
|£10,000 over five years||4.5%||4.5%||4.4%||4.5%|
It should be noted that the above table highlights the average rates, but consumers applying for a loan could get much better deals or, alternatively depending on their circumstances, pay significantly higher rates. For consumers in full-time employment and with a good credit score, the best rate available on a £7,500 loan payable over five years is as low as 2.8%. For those looking to get a loan of £5,000 payable over three years, the best possible rate available is 3.4%. To find out exactly what the monthly repayments on a personal loan at the rate being offered, use our loans repayment calculator.
|Top loan rates at £7,500 over five years|
|Provider||APR %||Monthly repayment|
|John Lewis Financial Services||2.9%||£134.31|
|Clydesdale / Yorkshire Bank||3.1%||£134.95|
|Post Office Money®||3.2%||£135.28|
|Hitachi personal finance||3.3%||£135.60|
|Top loan rates at £5,000 over three years|
|Provider||APR %||Monthly repayment|
|Hitachi personal finance||3.5%||£146.39|
|John Lewis Financial Services||3.6%||£146.60|
|Clydesdale / Yorkshire Bank||3.9%||£147.25|
|Post Office Money®||4.2%||£147.89|
Correct as at 9.6.20. *Non-Member Loan. Loans shown are available to new customers.
While applying for a personal loan to consolidate debts might seem like an efficient way to manage money at the moment, many consumers are finding that they are struggling to get their loan applications approved. As the economy remains uncertain, lenders are reluctant to take on risky lending, which means that consumers who have been furloughed will struggle to have a personal loan application accepted. As well as this, those with a bad credit score will also struggle to find a lender, so applicants could choose to do a soft credit check before making a personal loan application to know their situation.
“Some lenders are facing the same issues as other businesses with staff shielding or furloughing,” said a Monefacts.co.uk source. “This has meant that it has been harder for these lenders to process applications as quickly as they normally would, which has led to delays in a usual smooth process. In addition to this, all lenders have reduced their risk appetite due to the uncertainly surrounding people’s employment or the difficulty in evidencing continued employment through the usual automated methods. The end result is that most will have to choose a higher rate loan option if one is available at all”
The debt charity Step Change estimated that 4.6 million households have been negatively affected by the Coronavirus pandemic and have built up £6.1 billion of arrears and debt. According to the debt charity, this averages to £1,076 in arrears and £997 in debt per adult affected. In addition to this, Step Change states that 4.2 million people have had to borrow to make ends meet, with using credit cards (1.7 million) the most common form of borrowing, followed by using an overdraft (1.6 million) and a high-cost credit product (980,000).
Consumers already struggling with debt before the pandemic have been hit the hardest, with Step Change estimating that of those in severe problem debt before the outbreak, 45% have been negatively affected financially, which compares to 25% of those not in financial difficulty beforehand. Those in financial difficulty should consider seeking help and advice, either by contacting Citizen Advice or a free debt charity.
Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time. Links to third parties on this page are paid for by the third party. You can find out more about the individual products by visiting their site. Moneyfacts.co.uk will receive a small payment if you use their services after you click through to their site. All information is subject to change without notice. Please check all terms before making any decisions. This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.