Personal Loans: Up Close – And Jolly Expensive

October 9th, 2007

Despite the Bank of England holding base rate unchanged at 5.75 per cent this week, borrowers have seen the cost of personal loans rise by up to four percentage points as the impact of the credit crunch hits home. Nine banks have raised the rates charged on personal loans this week, say independent statisticians Moneyfacts.

Rates have already shot up by almost a quarter over the last year, according to figures released by the Bank of England this week.

However, this statistic does not take into account this week’s rises.

Bradford & Bingley increased what it charges on loans of between £2,000 and £2,950 by four percentage points to 17.9 per cent. It also increased rates when borrowing from £5,000 to £7,450 by 3.2 percentage points to 9.9 per cent .

A Bradford & Bingley spokeswoman said that the group had frozen its loan rates for the past 18 months, but had now increased them after five interest rate rises in the past year, as well as higher borrowing costs due to the current turmoil in financial markets.

The Cheshire and Derbyshire Building Societies both raised rates on loans between £5,000 and £7,450 by a third to 9.9 per cent .

Crisis-hit bank Northern Rock added half a percentage point to the interest charged on its personal loans, pushing the rate for all amounts borrowed up to 7.9 per cent .

A borrower taking out a £5,000 loan from the Cheshire at 9.9 per cent would now pay £161 a month against £154 on the old rate of 6.9 per cent , which over a three-year term would add an extra £255.

The increases only affect new customers and not existing ones.

Experts blame the rate rises on increasing uncertainty in the financial markets, rising levels of bad debt and a year of interest rate rises putting pressure on disposable income.

Lisa Taylor, analyst at Moneyfacts, said: “It comes as no surprise to see lenders increasing their lending margins in what has become a far more risky environment to do business.”

Borrowers should look around for the best rates because choosing the wrong loan means you could end up paying more than twice the amount you need to in interest. The cheapest unsecured personal loan when borrowing £5,000 over three years would cost you £152 a month from Yourpersonalloan.co.uk, at a rate of 6.3 per cent .

Yet if you borrowed the same amount at a more expensive rate of 12.9 per cent from insurer LV=, previously known as Liverpool Victoria, it would cost £167 a month, adding an extra £513 to your bill over three years.

Instead of the “buy now, pay later” mentality that has dominated the high street in recent years, financial advisers recommended saving up to make a purchase rather than relying on credit.

Sue Hannums, of independent financial advisers AWD Chase de Vere, said: “We have been lucky in recent years with low interest rates, which means borrowing has been cheap. But the tables have now turned. Borrowing is not that cheap any more and people need to look at other options. Now is the time to start saving up to buy things, instead of using credit.”

Anyone who finds themselves overstretched should draw up a budget to find out where they are spending their money and how they can make savings on everything from their utility and mobile phone bills to their weekly food shopping.

Philippa Gee, of IFAs Torquil Clark, also advised borrowers to reign in their spending. She said: “Rate rises on personal loans are not the only increase in costs that will hit the family budget.

“In the months ahead, many homeowners are going to be hit with higher interest rates on their mortgage and there is also Christmas ahead which is always an expensive time of year. If the credit crunch continues, we are likely to see more rate rises. You need to reduce your debts as soon as possible, starting with those with the highest interest rate such as credit and store cards, and limit your spending and expenditure as much as possible.”

Ms Taylor added: “The golden rule for any form of debt consolidation is to cancel, close and cut up your existing forms of credit.”

Golden rules

Look around for the lowest interest rate, or risk paying hundreds of pounds more than you need to over the term of the loan.

Avoid further borrowing if you take out a loan to consolidate debts, by cancelling existing forms of credit, and not extending credit card and overdraft limits

Resist the “buy now, pay later” mentality by saving up to buy goods and services, rather than using credit

Consider your expenditure and look at where you can make savings

Draw up a monthly budget and stick to it

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Alliance & Leicester Personal Loan Rate ‘Best In The UK’

October 9th, 2007

Alliance & Leicester has claimed that its new personal loan rate is the best in the UK.

Available from September 17th to November 4th, the new interest rate is 6.3 per cent and is on offer to new customers as well as existing Premier and Premier Direct customers.

Borrowers can take advantage of the rate on loans worth between £7,500 and £15,000.

“We continue to offer our customers best of breed deals across our range of products, and are constantly looking for additional ways to reward existing customer relationships,” said Richard Al-Dabbagh, senior personal loans manager at Alliance & Leicester.

He added that the bank has “consistently led the field” with its current accounts offering.

Alliance & Leicester last month launched its Premier 21 account, which is targeted at the 43 per cent of the UK’s 16 to 21-year-olds who are not heading to university this autumn.

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Savings And Loans Diverge From Bank’s Base Rate

October 9th, 2007

Rates for personal loans, mortgages and savings are now moving independently of the base rate set by the Bank of England, which was this week held at 5.75 per cent.

In spite of there being no movement in the base rate, rates for loans, mortgages and savings are continuing to fluctuate: while interest payments for loans and variable mortgages are on the rise, savings rates and fixed-rate mortgages are falling.

Over the past nine months, there has been a gradual increase in the rates on unsecured personal loans. Nine providers have now hiked interest rates on tiered loans with one, Bradford & Bingley, increasing rates by 4 per cent.

This is due, says Lisa Taylor, analyst at Moneyfacts.co.uk, to a year of interest rate rises, rising levels of bad debt and increasing uncertainty in the financial markets.

Some mortgage rates are also on the rise. Abbey’s variable tracker has increased 0.1 per cent while its fixed deals for five and 10 years have dropped by 0.15 per cent. At Nationwide, discounted deals have increased by up to 0.2 per cent for two-year deals while two, three, five and 10-year fixed deals have been cut by up to 0.2 per cent.

“If banks think base rates are coming down they are likely to raise tracker deals to increase their margins,” said Julia Harris, mortgage expert at Moneyfacts.co.uk.

So the 250,000 homeowners coming off fixed-rate deals in the next three months will face a hike of at least £100 a month for a new fixed-rate product, according to Newtomorrow.com, the debt solutions firm.

The average interest rate repayment on a fixed-rate mortgage in October 2005 was 4.96 per cent but borrowers can now expect to pay around 5.79 per cent.

There is also a big difference between the mainstream mortgage market and specialist lenders according to said Harris.

“Variable and fixed rates in mainstream lenders are moving slowly but specialist lending criteria is changing twice a week. Since the credit crunch, we have seen rates increase by over 1 per cent in the specialist sub prime range,” she said.

Meanwhile, savers are seeing a reduction in rates. In mid-September, fixed-rate savings returns were at their highest in six years, breaking the 7 per cent barrier. But this situation lasted only a few days and since the peak the average one-year fixed-rate bond is now paying out 6.135 per cent.

The reason for these anomalies, says Ray Boulger of John Charcol, is that Libor rates have remained above the Bank base rate. Although they have edged down 0.62 per cent from their peak on 13 September, at 6.26 per cent Libor rates are still way ahead of the base rate.

“If the markets expect the base rate to go up then you would expect the three-month Libor rate to be a quarter point above the base rate. But if the base rate is expected to fall, then you would expect the Libor rate to be a little less.”

There is still speculation over where base rates are headed. Industry commentators predict that the interest rate cycle has peaked and the next move will be down, but not until next year. The Council for Mortgage Lenders said borrowers should continue to plan for rates at or around current levels

Henk Potts, equity strategist at Barclays Stockbrokers, believes the Bank’s rates will stay on hold until the end of the year with some cuts likely towards the end of the first half of 2008.

The first signs of the housing market cooling may have appeared but the Royal Institution of Chartered Surveyors believes the Bank will want more concrete evidence that the housing market is softening before taking any action.

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