Debt isn’t bad. Bad debt is bad. Governments borrow, companies borrow. There’s no reason individuals shouldn’t, provided it’s planned, affordable, and cheap. Yet personal loans must be handled with care. This week’s deal is the UK’s cheapest, possibly saving you over £3,000.
Loan rates are at a historic low. For those that need to borrow it’s a good time, as interest rates stay fixed over the life of the loan. Yet it isn’t just rate that counts. There’s a shrapnel bed of lenders’ tricks to negotiate.
Is a loan the best option?
This article is about getting the cheapest personal loans, but they may not actually be what you need. The following articles are alternatives.
Undercut even the best loans, but requires discipline. For the financially savvy, there is a technique to beat the best buy, but you should only pursue it if you’re willing and able to play the system. It isn’t straightforward; read Half Price Plastic Personal Loans.
Short term loans. If you’re only looking to borrow over a short time read Get A Short Term Loan Completely Interest Free.
Cutting the cost of existing loans. If you already have a loan and are looking to cut the cost don’t be fooled. Just reducing the interest rate can cost you more. See Cut The Cost Of Existing Loans.
Secured loans. These are loans of last resort. If you can’t get any other loans then these loans are secured on your house, which may help eligibility, but do be very careful. Secured Loans, Lending Of Last Resort takes you through it.
Problem debts. If you’re worried about your debts, then read a Step-by-step Guide To Problem Debts.
Most high street loans are ‘unsecured’ and, while this sounds iffy, it’s actually much better than ‘secured’. That means the lender gets security – it can take your home if you can’t repay. Secured loans, like those often advertised on the TV, are loans of last resort (see Secured Loan article).
What to watch for with unsecured loans
Lenders use a variety of tricks to make sure they snatch as much cash as possible
Rate for risk
Advertising a ‘typical’ rate that only two thirds of successful applicants get, while charging those with poor credit scores more, is now the norm. Only a few lenders don’t do this and they’re often the best bet for those with a weaker credit history (see later).
Payment Protection Insurance (PPI)
In the event of accident, sickness or unemployment, a PPI policy should make repayments for you. The cost of the PPI isn’t included in the interest rate though, and lenders often deliberately lower the interest rate and increase the insurance cost. Now the loan looks cheaper, but the overall cost is higher.
Worse still, many loans automatically come with insurance unless you specify otherwise – so be careful, it can cost thousands and is tricky to cancel. If you’ve other means to cover repayments in the event of a problem, forget the insurance. Otherwise, see my Loan Insurance Cost-Cutting article.
Early repayment problems
Loans are designed to be for a fixed amount of time. Try to pay them off early and you’ll often be stung with up to two months’ worth of interest as a fine, plus more if you have PPI.
Some good news is that since 31 May 2005, the hidden penalty of ‘rule of 78′ interest calculations is a thing of the past. This is a hideously complicated formula which artificially allocated repayments as interest not capital – leaving more left to repay than you think (Rule of 78 Technical Explanation).
However, don’t think this means if you have an existing loan it ends. They are legally allowed to carry on with Rule of 78 calculations on existing loans until May 2007.
Choosing a loan
There are three key issues to address. Do you want insurance? Is it likely you will want to repay early? Do you have a good credit history?
Cheapest Uninsured Loans
If you’re looking for the cheapest personal loan without insurance, then focus on the lowest APR (Annual Percentage Rate).
Rates are currently low. Northern Rock* and Moneyback Loans* are 5.7% for loans of £1,000 and above, while Barclaycard and Abbey* both have a rate of 5.7%, for amounts over £4,000 and £5,000 respectively. However, all these loans are ‘typical rate’ so those with poorer credit scores may be offered a higher interest loan.
One thing customers need to be aware of when taking any loan is the ‘money delivery charge’ . Often there is an automatic ‘express delivery’ setting which gets you the money quicker. For example Northern Rock’s costs £45 and is its default setting.
To avoid this, simply tell them you don’t want it when setting up the loan and save the extra cash (though it will take about 4 days longer to get you the money).
For loans under £1,000, Cahoot* is cheapest at 6.9%, though this rate will jump after a year (See Flexible Loans for full details)
Advanced MoneySavers Note. Who and what is Moneyback Loans?
Moneyback is a new subsidiary of Alliance & Leicester; its trying to build a share of the loan market with this new brand and is pushing it very heavily. It’s called Moneyback as it promises to pay you back lump sums each year, varying depending on the loan amount.
Sound good? Unfortunately this only applies if you get one of its loans with payment protection insurance, and Moneyback can be easily beaten for insured loans, even with the cash refunds taken into account.
Therefore, the Moneyback aspect is a marketing gimmick which should be ignored. Just see this as a very cheap loan.
Flexible, for early repayment
Cahoot* also offers the cheapest flexible loan, currently at 6.9%. As it’s flexible, you may overpay to get rid of the debt more quickly and underpay when you’re short.
Yet, again, the 6.9% is a typical rate and depends on a credit score. Also, unlike normal loans, this rate is introductory for the first year, and is likely to shoot up after that – surrently to 8.5%. However, when it does, as it’s flexible, you could simply borrow the money elsewhere cheaper and repay this one. Overall this option is only for those who may want to pay off early or have unpredictable finances.
For some flexibility, but a rate fixed over the life of the term, then the Goldfish loan at 6.9% for over £5,000 borrowing, allow early repayments without penalties, and also enable you to make overpayments if you choose to.
Easier to obtain cheap loans
Those without a good credit history will find most ultra cheap lenders either reject them or charge a much higher interest rate. There are no hard or fast rules, but two types of loan which may help:
One Rate Only Providers: Most loans advertise typical rates, which means while 66% of accepted customers get the rate advertised, the rest are offered higher rates due to poor credit scores.
Currently the cheapest guaranteed rate lender (ie if you’re accepted this is the loan you’ll get) is the Skipton Building Society via an exclusive arrangement with commercial price comparison website Moneysupermarket (this loan doesn’t exist if you go direct to Skipton).
To qualify you need to be a home owner (though this isn’t a secured loan) over 25 and earn over £15,000. The following are the correct links – Link for £5k to £6,999 loans*; Link to £7k plus loans*. One thing to be aware of with these is that they won’t accept loan applications for debt consolidation purposes.
The alternative provider is the Nationwide which has a guaranteed rate of 6.7% for borrowing from £1,000 up.
Human Credit Scoring: Liverpool Victoria* has a decent rate of 6.5%. Unfortunately this is ‘typical’ not guaranteed, but the benefit is that if you’re border line, it may refer you to a manual assessment instead of rejecting you; it’s worth having a punt.
For those with more substantial problems struggling to get credit please read Where to start with problem debts? and Secured Loans: Cheapest Lending Of Last Resort.
Cheapest Insured Loans
Most Payment Protection Insurance (PPI) cover is pretty similar, though for those with specific issues, like the self-employed, the small differences can be a factor, so check.
The cheapest method is get the cheapest uninsured loan, and then a standalone PPI policy to cover it. This vastly undercuts buying them together. A growing number of firms, such as Paymentcare* and Payprotect, offer cheaper policies.
For those wanting the convenience of a loan and insurance together it gets trickier. Always ignore the interest rate, it’s irrelevant. Instead ask “what’s the total cost, including insurance?” and compare based on that.
For example, while Sainsburys and Leeds & Holbeck loans have the same interest rate, if you got a £10,000 insured loan over 5 years, Sainsburys’ more expensive insurance would mean you’d pay over £2,100 more.
For loans of under £5,000 Nationwide and Leeds Building Society mostly come out on top. For higher amounts, Cahoot* and Leeds BS top the list.
How much can you save?
Borrow £10,000 uninsured over 5 years from Yorkshire Bank at 8.9% and you’d pay £2,325 in interest over the life of the loan. With Moneyback at 5.5%, it’s just £1,435.
For an insured loan,Yorkshire Bank’s total cost is £4,890 while with Moneyback you’d pay £3,760. Yet Leeds and Holbeck, even though it has a higher 6.9% rate of interest, has much cheaper insurance and therefore costs only £3,210 (showing just how expensive Moneyback’s insurance is!)
Even better, use the Moneyback uninsured loan and Paymentcare’s PPI and it costs under £2,000, almosy £3,000 cheaper than Yorkshire.
|£10,000 loan over 5 years|
|Monthly Repayment||Total Interest||Saving||Monthly Repayment||Total Cost (1)||Saving|
|Leeds and Holbeck||6.9% (2)||£197||£1,790||£535||£220||£3,210||£1,680|
|Moneyback with standalone PPI||5.5% (3)||-||-||-||£199||£1,950||£2,940|
|(1) Interest & insurance (2) Typical rate, varies with credit score (3) Insurance from Paymentcare, £8.60p/month Source: Moneyfacts, Uswitch, Moneysupermarket|