New research from moneysupermarket.com shows that those looking to take out a £5,000 personal loan are being charged an eye-watering average interest rate of 10.3%.
That compares to three years ago when the average APR (annual percentage rate) was just 5.9%. And that was despite the Bank of England’s base rate standing at 4.75%.
So it used to be that banks charged around 1.15 percentage points over the base rate, but now it’s almost ten percentage points, meaning banks have upped their profit margins tenfold.
If you want to borrow higher amounts, the rate is slightly better. The research shows people looking to borrow between £10,000 and £25,000 will pay an average of between 8.4% and 8.75%. But that still compares badly to three years ago, when the average lender charged less than 6% on these loans.
A similar picture emerges when you look at the rates charged for fixed mortgages. Many homeowners are choosing to fix because they’re worried about possible rate rises in the future. But the margins charged on these deals are now at their highest levels for 20 years.
Why the high prices if the base rate is so low?
The answer is simple: the credit crunch has made banks extremely risk averse. Lenders are outright rejecting far more loan applications, particularly from people who’ve had previous credit problems, can’t prove their income or who don’t have much job stability.
Even if you have a great credit record, providers will still charge you more as they try to rebalance books that have been badly hit by bad debts and the fallout from the financial crisis.
But the good news is that this may be starting to ease up. Tim Moss, head of loans and debt at moneysupermarket.com, said: “We have seen a recent glimmer of hope as loan rates crept down slightly in August.
“Competition seems to be returning to the loan market which is great news for consumers; however, lenders will need to continue reducing rates if they want to draw customers back, particularly those who want to reconsolidate their debt.”
What’s out there?
As Tim explained, there are some good deals available, especially if you’re seen as a safe bet by lenders.
Sainsbury’s Bank’s Personal Loan offers a typical APR of just 8.7% to anyone borrowing between £5,000 and £7,499, but you need a Nectar card, while Alliance & Leicester’s Personal Loan headline rate is just 8.8%.
If your credit rating is less than perfect then you won’t be qualifying for these deals, but you can still compare the loans available and check you’re receiving the most competitive rate open to you.
Where to find a competitive loan
As well as being more cautious about who they will lend to, lenders are also being much choosier about who receives the leading rates.
They aren’t just looking for potential customers with excellent credit ratings, many banks are also reserving the keenest deals for existing customers.
For example, Nationwide is offering FlexAccount debit customers a typical APR of just 7.7% on borrowing up to £14,999.
Bearing this in mind, it can make sense to approach your own bank first and ask what deals they’d potentially offer you. Having said that, this isn’t always the case, so don’t assume your bank is the best option but look at all your options.
Whatever you do, don’t use a scatter-gun approach and apply for multiple loans with five out of the top ten lenders.
The chances are you will be turned down at least once, and this will be recorded on your credit record, which may prejudice future applications.
Each time you apply for a personal loan, credit card or mortgage, it leaves a “footprint” on your credit file, regardless of whether you go on to take the credit or not. Applying for multiple loans can make lenders nervous.
Also, if you just want one £5,000 loan, don’t apply for four just to see what rates you will be offered. Lenders will simply see someone applying for £20,000 credit.
Before applying for any loan check your credit record (available from the likes of Experian.com and Equifax.com). If there are any mistakes then remove them before applying. You can also add an explanatory note to any previous problems - for example failing to pay bills after redundancy or divorce.
It is also possible to do an “eligiblity check” with moneysupermarket.com. By entering just a few key facts – such as employment status, whether you are a homeowner and a brief outline of your borrowing history – you can identify the types of deals you will most likely qualify for, keeping your credit record as squeaky clean as possible.