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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.
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|
"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.
"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.
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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