Steve Willey, Head of Cards
Huge news broke in the loans market earlier this week when Barclays, the UK's fourth largest bank, withdrew from the secured loans market.
It will stop taking new loans through its First Plus business from August 9, placing real urgency for consumers to sign up for its market-leading rate of 6.6% while it is still available as Tim Moss discussed in his article 'act now to secure leading loan rate'.
It seems loan providers are coming under pressure from the rising cost of funds caused by the credit crunch and the crackdown on payment protection insurance (PPI), with GE Money also scaling back its business and Picture Financial having recently been taken over by Targeted Loans.
And, it's not just the secured loans market that has been affected, the cost of unsecured loans has also gone up. Moneyback Bank, owned by Alliance & Leicester, offers a rate of 7.6% but this has increased from 6.9% earlier this year. The lowest unsecured rate is from yourpersonalloan.co.uk at 7.3%, but that too has risen from 6.9% since the start of the year.
However, whereas the loans and mortgages markets have been battered by the credit crunch, the battle for business in the credit cards market has become furiously competitive as borrowers search for alternatives. The focus tends to go on interest-free deals but cards which offer a low rate for the life of a transferred balance can also be a great option, particularly if you don't want the hassle of moving from one card to another when 0% offers end. There are some really attractive life of balance cards available at the moment and the rates compare favourably against the best unsecured loan rates, making them a good alternative.
Why life of balance transfer cards could be the solution
While the cheapest personal loan has a rate of 7.3%, the market-leading life of balance transfer card - the Capital One Low Rate Balance Transfer Card has a rate of 5.5% until the balance is repaid with a 3% balance transfer fee - meaning the value of the debt you need to repay will increase by 3% when you move it over to the card. Another good deal is the Citi Platinum Life of Balance Card which charges 5.8% until the balance is repaid with a balance transfer fee of 2.5%.
So if you had a £6,000 loan over three years at the yourpersonalloan.co.uk rate of 7.3%, you would pay back £676.03 in interest. However, with the Capital One Low Rate Balance Transfer Card, you could make the same monthly repayments and pay off the debt in the same amount of time but pay only £530.74 in interest - leaving you £145.29 better off.
Be aware however, that lenders have tightened their acceptance criteria since the credit crunch and as such you are only likely to secure the leading rates if you have a good or excellent credit score. If you're unsure about your credit status, use our Smart Search tool, which will allow you to compare cards based on an assessment of your credit score without leaving a footprint on your profile.
What should you look out for?
The most important thing to remember when taking out a life of balance transfer card is to not use the card for additional spending - the low rate applies to the transferred balance only so you will be charged a higher rate of interest on any purchases you make and because of the payment hierarchy most providers use, your monthly repayments will go towards clearing the cheapest debt first. For more on this subject check out our article 'the interest-free credit cards that may charge you interest'.
If you want a card for spending, take out a 0% purchase card - the current market leader is the Capital One Platinum which offers 0% on both purchases and balance transfers until October 1, 2009 with a 3% handling fee and a typical rate of 12.9%.
What about paying off smaller debts?
If your debt is reasonably small and you will be able pay it off relatively quickly, consider a 0% balance transfer card.
With a 0% balance transfer card your aim should be to pay off the debt within the introductory period or be willing to move to another 0% balance transfer card once the introductory rate expires - otherwise you will start being charged a much higher rate.
The leading interest-free deal is the Capital One Balance Transfer Platinum Card, which offers 0% until November 1, 2009 with a balance transfer fee of 3% and a typical rate of 15.9%. It is closely followed by the Virgin Credit Card, which offers 0% for 15 months before reverting to the same typical rate - it has a 2.98% balance transfer fee. Both of these deals offer short 0% purchase offers, so avoid spending on these cards because once the 0% period ends you'll start paying a high rate of interest on your purchases.
Have your say: Are you struggling to pay your debts off or have you had trouble obtaining credit? Visit our forum and let us know.
Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.
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