Personal loan rates for borrowers in need of smaller amounts such as £3,000 or £5,000 have been shooting up over recent months and are now at a 10-year high.
But for borrowers with unblemished credit files looking to take out a loan between £7,500 and £15,000, the interest rates being charged have fallen to their lowest level for years.
A “two-tier loan society” has been created as a result: Anyone with a squeaky clean credit history can borrow larger amounts for rates as low as 6.8%, while those wanting to get their hands on as little as £3,000 can end up paying as much as twice the amount for the cash.
Tim Moss, head of loans and debt at moneysupermarket.com said: “For families in need of some extra cash to see them through these difficult times, or looking to consolidate and pay off debts already built up, a personal loan can be a great option.
“However, recent moves in the loans market mean you will pay much higher interest rates if you have an imperfect credit file. The same is true for anyone wanting to borrow £5,000 or less.”
How much have rates changed?
The average rate paid by people borrowing £3,000 from one of the 10 best deals on the market has jumped by a massive 1.02 percentage points to 15.49%, while the average rate paid on £5,000 – again by those borrowing from one of the 10 table-topping deals – has risen by 0.23 points to 9.94%.
When you look at the typical rates paid by those borrowers in the market for loans of £7,500, however, this upward trend is reversed.
The average rate paid by someone qualifying for one of the top 10 deals for this amount is now 7.41%, which is the lowest it has been since June 2008.
Why are lenders charging so much more for smaller loans?
One of the main reasons that loan rates for amounts of between £3,000 and £5,000 have soared is that lenders are no longer making money from payment protection insurance (PPI).
Following a High Court ruling against the banks last month, the industry-wide compensation bill for the mis-selling of this type of cover, which was often sold alongside personal loans, has also been estimated at £4.5 billion.
Banks and building societies, many of which remain wary about lending to people with poor credit histories, are therefore desperate to claw back some revenue from new personal loan customers.
Where can I find the best deals?
For borrowers looking for a loan of £10,000, the best representative APR available at the moment is 6.9% (fixed), which you can get from Alliance & Leicester. Over five years, the total charge for credit at this rate would be £1,794. However, you will not qualify for this deal unless you have an excellent credit score.
For borrowers with good but not perfect credit profiles looking for the same loan terms, the best deal is therefore from Fluent Money (exclusive to moneysupermarket.com). Its representative APR for £15,000 borrowed over four years is 8.1% (fixed).
Meanwhile, for those with poor credit scores, the best option is a Central Capital Secured Loan. It has a representative APR of 13.9% (fixed) on a £10,000 loan repaid over five years.
Both these deals are homeowner loans, though, meaning that you will be only accepted if you are prepared to put your home up as security.
For those looking for £5,000 over three years, deals worth a look include the Sainsbury’s Personal Loanwith a representative APR of 8.3% (fixed) and Zopa Loan at 8.6% (fixed) for those with good credit scores. Those with less than perfect credit files, however, will be looking at much higher rates.
In fact, the lowest representative APR available at the moment for borrowers of this kind looking for £5,000 over three years is 53.9% (fixed) via Aspire Money.
Are there any alternatives?
If you only need to borrow a small amount, and are affected by rising personal loan rates as a result, the best alternative is likely to be a low-rate credit card.
Those with debts, for example, could opt for a balance transfer credit card offering an introductory rate of 0%.
Cards of this kind include the Barclaycard Platinum, which offers new customers 0% on balance transfers for a massive 20 months, after which the representative APR is 17.5% (variable).
Anyone applying for the card via moneysupermarket.com can also get £10 off the balance transfer fee of 3.2% of the amount being switched.
Those who need some cash to fund spending, on the other hand, would be better off with a card offering 0% on purchases. The best offer on the market at the moment for those looking for a card to make purchases is from Marks & Spencer. Its Credit Card offers new customers 15 months at 0% on purchases, after which the representative APR jumps to 15.9% (variable), as well as a rewards scheme.
The Tesco Clubcard Credit Card also offers 15 months interest-free on purchases, with a representative APR after this of 16.9% (variable). The card also doubles up as a Tesco Clubcard, enabling you to collect point when you spend.
However, as with the best personal loans, market-leading deals of this kind are reserved for people with good credit scores. Anyone with concerns about whether or not they will be accepted should therefore use the moneysupermarket.com Eligibility Checker tool to find out without running the risk of further damaging their score with rejected applications for credit.
How can I improve my credit score?
If you are not already listed, then perhaps the easiest way to improve your credit score is to sign up to the Electoral Roll.
Other steps you can take include cancelling unused credit cards and accounts to slash the amount of credit you have access to and taking out a credit-building credit card.
You must pay the balance off every month in full with a card of this kind, though, as not only will this have a more positive impact on your credit file, it will also prevent you getting stung by huge interest charges.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.
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