Pay less when borrowing a loan

by Mark Adams on 05 September 2010  |  4 comments
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The average rate on a £5,000 personal loan has hit 12.6% - its highest level since 2000 - even though the official cost of borrowing is at an all-time low. Don’t stand for it - from the best card deals to peer-to-peer lending networks, we reveal the low-cost alternatives to taking out a loan.

September - with the arrival of new registration cars and the end of the home improvement season - sees demand for personal loans at its highest. Figures from Sainsbury’s Bank show that a fifth of the £13bn taken out in loans so far this year were to fund DIY projects - but if you think increased demand is set to bring the cost of borrowing down, think again.

The average cost of a £5,000 personal loan is at its highest level since 2000, according to new figures from analysts Moneyfacts. The average loan rate is now a whopping 12.6% - more than 12% above the Bank of England base rate - pushing the profit margin on an unsecured loan to an all-time high.

Yet the average figure doesn’t tell the whole story - lenders’ individual pricing means that most borrowers pay more than the advertised ‘typical’ rate. And smaller value loans below £5,000 are even more expensive: figures show that borrowers are now paying up to 135% more for their loans compared to four years ago.

Just four years ago, the average loan rate was under 8% - so what’s going on? It seems, as well as wanting to balance the books, lenders have lost their appetite for risk. “Customers successfully applying for unsecured credit are paying a heavy price as the increased risk is being passed on through increased margins,” claims Moneyfacts expert Michelle Slade.

Yet you don’t have to pay excessive premiums to borrow - there are a number of alternatives to loans on the market. We uncover your best options.

Credit card money transfers

The average rate on a £2,500 loan is nearly 14% but it’s currently possible to borrow the same sum and pay just 1.9% interest over one year - that’s just £47.50. MBNA has launched a Platinum credit card offering money transfers and credit card balance transfers at a special rate of 1.9% for 12 months.

What this means is that you can make a major purchase against your overdraft or credit card, then offset it against the MBNA card - paying far less than you would for a loan in the process. Alternatively, if you prefer, you can transfer cash from the card straight into your bank account and pay with cash instead. There’s no handling fee to pay (even on the money transfer, which is very unusual) but the rate reverts to a steep 16.6% APR once the year is over - so make sure you clear the debt within the 12 month deadline to benefit.

Linked loan deals

You can still find personal loans charging interest in single figures - but you’ll probably need to switch bank accounts or credit cards to do so. Banks are increasingly reserving their best deals for existing current account or mortgage-holders in what’s termed “cross-selling”.

For example, the best deal currently on the market is the 7.7% personal loan from Nationwide - but this offer is only open to people who sign up to the bank’s FlexAccount as their main current account or existing FlexAccount customers. Sainsbury’s offers loan rates as low as 7.8% - but you’ll need to be an existing Nectar Card holder to qualify (in addition to having an excellent credit rating).

If you’re not one of the lucky few, then the cheapest deals around are priced at 7.9% APR, from both Tesco Bank and Santander-subsidiary Alliance & Leicester - but bear in mind these are both “typical” rates and not available to everyone.

Peer-to-peer lending networks

You could bypass the big banks altogether to borrow at a reasonable rate - if you head to one of the UK’s two so-called peer-to-peer lending networks. The leading outlet is Zopa.com, which links together individual savers with individual borrowers. The model sees savers lend sums to borrowers and earn interest somewhere of around 8.3%, while borrowers pay around 9% to borrow.

This week has also seen the launch of rival outlet Funding Circle, which operates in a similar way to Zopa but issues business loans and offers cashback in addition to interest to savers who invest in the scheme. Savers will earn interest of between 6% and 9% while business borrowers will pay between 8% and 11%. Read Earn up to 9% on your savings for more details.

Best card deals

In the current climate, it’s probably worth looking to the credit card market for an affordable source of borrowing. If you’re looking to borrow anything under £2,500 and can afford to pay back the bulk of it within a year, you could benefit from a card offering 0% on purchases.

Leading the way is the Tesco Clubcard Credit Card, which offers 13 months interest-free purchases, or the credit card deal from Sainsbury’s Bank and the Barclaycard Platinum with Purchases offer, both of which offer one year’s interest-free purchases.

If you need more than a year to repay your sum, it’s best to look to a low-rate credit card. These don’t have an interest-free period but instead offer a low interest rate for the lifetime of the card - and available rates compare favourably to personal loan offers. The best available deals in this sector are the Halifax Easy Rate Mastercard with a typical rate of 6.9% APR and the 6.8% APR offer from Barclaycard.

Find the best credit card deals on the market with our constantly-updated best buy tool.

More: Get a cracking credit card today | Transfer your credit balance for free