CONSUMERS may be poised for the cost of borrowing to rise since the Bank of England raised interest rates earlier this month, but so far personal loan rates remain “in freefall”, according to new research.
Analysis from personal finance website Moneyfacts has found that the cost of an unsecured personal loan has plunged in the last five years, a period in which there was only one base rate cut and two more recent rises.
It noted lenders have been slashing the cost of their personal loans in a bid to overthrow the market leaders. This has resulted in the average interest rate on a £5,000 unsecured loan falling from 10.7 per cent to 6.8 per cent since 2013, saving consumers about £300 over three years. Other loan tiers have also seen rates fall over the last five years (see table below).
A borrower shifting £5,000 of debt from a typical 18.9 per cent APR credit card to a 3.3 per cent APR loan, the cheapest currently available, could save £1,195 in interest over three years, Moneyfacts calculated.
However, it noted that people looking to borrow smaller sums would probably be better served by using a 0 per cent balance transfer credit card and paying it off within the interest free period. Providers are extending the length of these deals, with consumers now getting an extra five months to repay interest free, compared to this time last year, based on the longest deal without an annual card fee.
Rachel Springall, finance expert at Moneyfacts, said it is encouraging to see that the personal loan market has been left unscathed by changes in the base rate, but it may not last forever.
“Lenders are advertising headline-grabbing loan rates but these typically focus on loans of £7,500 or more, so borrowers need to keep this in mind when they are shopping around for a smaller loan,” she said. “It’s also important to remember that advertised rates only have to be given to 51 per cent of successful applicants, so not every customer is guaranteed the best rate.
“There is no telling how long lenders can sustain the current rates either, with economic challenges in the market that could impact the providers offering these cheap deals.”