Focus on: Exclusive! New loan from 118 118

Directory enquiries provider 118 118 has launched a new loans service which is, initially, available exclusively through MoneySupermarket. The loans are designed to bridge the gap between personal loans, which are often limited to borrowers with good credit scores, and very short term payday loans which are expensive and can be risky.

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The company decided to launch 118 118 Money after commissioning research that revealed that almost a million Britons were refused loans of between £1,000 and £5,000 over the last 12 months alone.

Here, we investigate the pros and cons of the deals and see how they shape up compared to alternatives.

What’s the deal?

The new, unsecured loans of between £1,000 and £5,000 are aimed at applicants who have been turned down by their bank but don't want to venture into taking payday loans or a loan which is secured aganist their home. The deals come with representative APR of 35.9%, although applicants who are refused this rate may be offered a much higher 79.9% APR known as a 'second chance' rate. You can choose a repayment term of 12, 18 or 24 months.

The loans - which are not secured on your property - come with features such as an interest-free day on your birthday, and a free credit status report every six months.

118 118 claims that it offers honest credit guidance, meaning that it will tell you if it thinks a cheaper personal loan from a bank would be a better option for you.

And the good news for anyone who is a bit disorganised, is that any late payment fees will also be refunded should you make the next three consecutive payments on time. However, this kind of oversight is not advisable as it will further damage your credit score.

Any catches?

The 35.9% headline interest rate is undoubtedly the biggest catch with this deal, and means that it is better to borrow over the shorter term of one year wherever possible.

You must also own a mobile telephone and have an email address to be accepted as a customer by 118 118, while you will face penalties if you miss payments or want to clear the debt more quickly.

What’s the verdict?

These loans are aimed at borrowers whose credit scores are not robust enough to be accepted for a bank or building society loan but who are looking for a lower rate, longer-term alternative to a payday loan.

And they do work out a lot cheaper than taking out a payday loan for a comparable time. If, for example, you took out a £1,200 loan through QuickQuid over 10 months on an APR of 1,362%, you would pay back a total of £2,831 – which is £1,631 in interest.

But if you borrowed the same £1,200 from 118 118 for the minimum term of 12 months, you would pay back £1,411 – which is only £211.44 in interest.

In comparison with credit cards aimed at people with under-par credit scores, meanwhile, the 35.9% APR is similar to the rates charged on purchases – and lower than those charged on cash advances.

The best credit card of this kind on the market at the moment is the aqua Classic, which has a representative APR of 29.7% (rising to 49.9% for those it considers a very high risk) and charges 39.95% plus a 3% fee on cash withdrawals.

The 118 118 loan is therefore a cheaper way to get your hands on the cash you need, and also has the added advantage of a fixed repayment plan that is easier to stick to and removes the temptation of continuing to spend.

Top tip!

However, the unsecured personal loans available from banks and other mainstream lenders are a much cheaper way of borrowing – if you have the credit record required.

Although the lowest rates (of around 5%) apply to medium-sized loans of between £7,000 and £15,000, rates on loans of £3,000 still start around 12% over a year – which is a whole lot cheaper than 35.9%.

But, of course, these deals are reserved for borrowers with excellent credit histories.

To avoid paying over the odds, you should nevertheless check out MoneySuperMarket’s Help me find a loan search tool before applying for any loan. It will search the market for the best loans you are likely to qualify for, without leaving a footprint on your credit file.

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