Even though the Bank of England base rate has plummeted to 1%, loan rates have headed in the opposite direction with banks increasingly fearful about lending to consumers during the economic downturn. Personal loan rates have increased by around 3.5% in the last 18 months while the secured loan market has imploded with only a handful of lenders still offering deals.
However, amid the turmoil there has been a rare ray of hope for borrowers as one provider has bucked the trend and slashed its rate.
What is the deal?
The offer in question comes from Blackhorse, the secured lending arm of Lloyds Banking Group, which is offering an exclusive rate through moneysupermarket.com.
The deal comes with a headline rate of 7.9% and a typical rate of 11.9% on loans with a value ranging from £10,000 to £40,000. As it is a secured loan, customers are borrowing against the equity in their property which will mean their home is at risk if they are unable to meet the repayments.
Currently the rate is only beaten on rate by the Platinum loan, another moneysupermarket.com exclusive, which has a headline rate of 7.8% and a typical rate of 11.4%.
How viable an option is a personal loan?
If you lose your job, be careful about borrowing to cover day-to-day living costs as you could be storing up more problems for yourself further down the line, particularly if you could be out of work for some time. However, some people may be confident that they will find work again quickly so a loan could get them through a short-term funding squeeze. If this is the case, there are options available.
Unsecured personal loans are more widely available than secured loans but you’re going to need an exceptional credit history to qualify for one of the leading rates. This is because the lender has no security with a personal loan as you are not providing any equity. With defaults on payments increasing during the credit crunch, providers are more reluctant to lend. Personal loans are also not available on amounts above £25,000.
However, if you do have a good credit rating and want to borrow a smaller amount then there are more options available. For example, for a £10,000 loan over five years Nationwide Building Society has a typical rate of 7.9% which would lead to monthly repayments of £200.99. Alliance & Leicester offers a typical rate of 8.0%.
What if you have a poor credit history?
The low headline rates are only available to those with immaculate credit histories. Even if you are accepted as a customer you may not get the best rate as most lenders price for risk, meaning they will examine your credit history before offering you a deal. The typical rate must be offered to at least 66% of accepted customers but you must be offered a higher rate, or have your application declined.
Those who know they have a poor credit history should be careful about how they apply for deals. Though it is still possible to find loans, the rates available to these customers are much higher and applying for market-leading loan is counter-productive as being rejected will only further harm your credit score.
If you are unsure about your credit history then you can retrieve loan rates through the moneysupermarket.com SmartSearch tool. You will be asked some brief questions to gain an idea of your credit history. The tool will then display rates and product details of loans you are likely to be accepted for.
There are deals out there for those with poor credit histories. For example, Ocean Finance offers a headline rate of 15.2% to homeowners with a typical rate of 16.9%. This is fixed for the loan term and so is ideal for those looking to work their payments into a monthly budget.
It’s also advisable to send off for a copy of your credit file from the reference agencies Experian or Equifax before you apply for any form of loan or credit. It only costs a few pounds and will enable you to see what your credit score is and what information is held about you – credit files can contain mistakes which can impair your rating, so it’s well worth checking that the details are correct. If you do spot a mistake you can have it rectified by making a ‘notice of correction’.
What are the other alternatives?
For some people, a loan is neither a sensible nor viable option. If you are already struggling financially you should consider non-borrowing debt solutions such as making cutbacks and negotiating lower monthly payments to your creditors. A debt adviser will be able to help you with this. Visit our debt section for more information and watch Clare Francis’ interviews with Julie Griffiths from Citizens Advice and Caroline Hamilton from the Consumer Credit Counselling Service. If you are worried about redundancy or have recently lost your job, listen to our 'Redundancy special' podcast on Cashing In - Moneysupermarket's new podcast show.
Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.