Loan tarts, the myths exposed

Unsecured personal loan customers could save £1.25 billion in interest by switching to a more competitive loan mid-term, according to research by uSwitch.com. The actual cost of switching is low, with one in four lenders not charging anything and 67% charging a typical early repayment penalty of one month’s interest or around £39. This fee is small, particularly when compared to the £166 a year consumers could save by opting for a more competitive deal from the offset. With eight major personal loan providers already having dropped rates over the past month by up to 5.5% APR, there has never been a better time to switch.

Mike Naylor, personal finance expert at uSwitch.com, the online price comparison and switching service, comments: “In such a volatile unsecured personal loan market, five years is a long time to sick with the same provider as rates fluctuate constantly. For example, in the second half of 2007, more than 30 providers increased loan rates by around 1% APR. However, since the last base rate cut at the beginning of December, eight major lenders including Alliance & Leicester, Moneyback, Lloyds, Barclays and Sainsbury’s have already cut their rates by up to 5.5% APR. With more base rate decreases predicted over the next 12 months it’s possible that we may see other providers following this example and offer more competitive deals than those available last year.”

Further analysis shows that both confusion and apathy are holding consumers back from making major savings on their existing loan. 2.5 million people think the savings from switching a loan mid-term are too small. 1.6 million loan customers said it’s too much hassle and the most the discouraging news is that 14% wouldn’t even consider doing it. An additional 6% think it it’s impossible to switch a loan mid-term. However, 4.5 million people didn’t know how much interest they would pay on a £10,000 loan over five years at an APR of 6.9%, so it’s no great surprise that people are lost in this web of confusion.

People can save much more by choosing the right loan at the start – an £8,000 loan with a rate of 6.5% APR repaid over 5 years costs almost £830 less in interest than the same loan at a rate of 10.9% APR .

Mike Naylor concludes: “The days of being able to shop around for best buy personal loans are well and truly numbered with seven of the big providers now operating personal pricing. This new sales tactic provides a personalised rate for each loan applicant and no longer allows consumers to compare competitive APR’s as they are not advertised. While they still can, consumers should give loan providers the wake-up call they need and move their business elsewhere if better deals become available. Whilst consumers continue to display this level of apathy, loan providers will rub their hands together with glee and continue to profit from the not so tarty loan customers.

“In a personal finance market where 60% of consumers claim to have switched their credit card, incurring an average balance transfer fee of £51.65, it’s disappointing to see people’s reluctance to fuel competition in the loan market. Switching unsecured loan providers mid-term is quick, easy and, in many cases, a money saver. Unfortunately, it’s just not a practice that consumers are familiar or comfortable with. However, we can’t ignore the fact that lending practices are getting tighter so the option to move may not be available for much longer.”

Tips for switching loans:

Contact your lender first to find out how much it will cost you to pay your loan off early.
Compare this to the cost of the new loan, taking into account the cost of the settlement figure.
Avoid lenders that offer personal pricing as they do not advertise rates for comparison.
Don’t just stick with your current account provider, online rates can be more competitive than those offered in-branch.
Use a comparison site to get the best deal, don’t trudge up and down the high street.