Sub six per cent personal loans – an endangered species?

Michelle Slade, personal finance analyst at moneyfacts.co.uk comments: “At this time of year, when many of us are still recovering from the after effects of our Christmas spending or perhaps trying to commit to our new years resolutions to sort out our finances, personal loan rates are creeping up again.

“Although personal loan rates are not directly impacted by a base rate rise, since the last rate hike in January, moneyfacts.co.uk has seen eight lenders increase their unsecured personal loan rates by as much as 8% for some tiers. Three of these providers also changed the rate tiers available, resulting in two of the loans becoming much more expensive for smaller amounts of borrowing.

“Research by moneyfacts.co.uk, shows that on a loan of £5K over 3 years, only four providers now offer rates below 6%, with more than 40% of the market charging in excess of 8%, and 16% charge over 10%.

“With a difference of 14.8% APR, between the most and least competitive rates, shopping around for the best deal is an absolute must. Choosing the wrong deal could be the difference between paying £180 per month or £151 and incurring almost £1,044 extra in interest over the three year term.

“If it’s only a relatively small amount on credit cards that you wish to refinance, then perhaps a life of balance deal may prove a credible alternative, offering increased flexibility with very competitive interest rates. The Moneyfacts.co.uk best buy is currently the Marks & Spencer Money, & more card, charging 3.9% for the life of the balance with no up front fees. With base rate at 5.25% and predicted to go higher, it’s unlikely that such low rates are going to be around for much longer.

“But if you do opt for one of these credit card deals, as opposed to a personal loan, the real way these will save you money is to maintain a repayment level similar to that on a structured loan, otherwise making only the minimum repayments will extend the loan term, incurring more interest.

“Remember if you are shopping around for a personal loan, first check out other options available to you. Dependent on the loan size and term, other forms of lending such as credit cards, flexible loans or, in some cases and for larger amounts, a further advance on your mortgage may be more suitable.

“Secondly, always check you are getting the most competitive deal, for both your interest rate and if applicable any insurance cover. You will be committing to a long term deal, so making sure you get it right at the start can save you hundreds of pounds in interest.

“With the OFT due to review PPI later this year, if lenders are forced to lower the cost of their PPI cover and revert to a ‘pay as you go’ type policy rather than single premium, we could potentially see best buy loan interest rates reaching double figures before the end of 2007.”