Personal loans to soak up your seasonal excess

Published 12th Jan 2010

There are some good deals on offer if you meet the lending criteria, says Jill Papworth


The new year is a prime time for consumers to seek out personal loans, often consolidating existing debts from Christmas. In January last year, for example, almost 60% of all loans issued were for debt consolidation purposes.

Nationwide this week launched a market-beating personal loan rate of (typically) 7.6% APR for loans of £7,500 to £14,000 over a one-to-five-year repayment term. This compares with the average rate on non-secured personal loans of between £7,500 and £15,000 of 10.3%, according to financial comparison website MoneyExpert.com.

But this is on offer only to the building society's main FlexAccount customers, and only when they have deposited £750 or more per month for the previous three months, excluding transfers from other Nationwide accounts.

More accessible to new customers, and also at a highly competitive typical rate of 7.9% APR, are loans of between £7,500 and £15,000 over one to seven years from Sainsbury's Finance. Anyone with a Nectar rewards card can apply, and applicants are offered the perk of double Nectar points on their shopping for two years.

When looking for a loan, you need to be aware that lenders will generally only approve applicants once they have checked their creditworthiness, and even if you are approved for a loan, the rate you are offered may not be the "typical APR" advertised.

By law, the "typical" rate must be one given to at least 66% of people who apply as a result of the advertised rate. But the actual APR you are offered depends on your personal circumstances. Essentially, the more creditworthy you are, the lower it is.

Some lenders, including HSBC, Nationwide, Black Horse and Abbey, use what's known as "personal pricing", which means they don't advertise a typical APR and you won't have any idea of the rate you'll be offered until you actually apply.

It's not a good idea to make multiple loan applications, particularly if you have a poor credit history. Each time you make an application, the lender will carry out a credit search, which will leave a mark on your credit record. Too many marks have a negative effect and can reduce your chances of making successful applications in the future. Also, check first whether you can get the same loan at a cheaper rate by applying through an online comparison or "aggregator" site. Moneysupermarket.com, uSwitch.com, Fool.co.uk and Moneyfacts.co.uk sometimes offer exclusive low-cost loan deals.

Alliance & Leicester, for example, is currently offering a typical APR of 8.9% on a £7,500 loan over five years to the general market, but the same A&L loan is available at 7.9% to those who apply through Moneysupermarket.com (also accessible through guardian.co.uk/moneydeals) and uSwitch.com. Note, however, that not all competitive rates are available on these sites: you can't find Sainsbury's 7.9% loan on any of them, for example.

If you are a mature borrower with a decent credit record, also check out what rate you could get on Zopa.com, the radical peer-to-peer internet lending site dubbed the "eBay of banking", which allows people to borrow from and lend money to each other, thereby sidestepping the banks.

Borrowers need to be at least 20 years old and have a good credit record to be accepted by Zopa. It says it turns away 50% of those who apply because their credit record is not as good as it needs to be, or because they are trying to borrow too much. But once you are accepted, the better your credit status, the cheaper the loan rate you get – with the added advantage that, because Zopa is not a bank, the way it carries out credit checks does not affect your credit score.

The lending site has doubled in size in the past year, having made 12,813 loans worth £63m at the beginning of this year compared with 6,919 loans worth £30m as at 1 January 2009. Rates fluctuate depending on how much is being lent and borrowed by the Zopa community at the time, so there is no guarantee that they will better or even match the best loan rates on offer from the banks – but it is worth checking.

When taking out a loan, bear in mind that if for any reason you want to pay it off early, virtually all lenders will charge you a penalty (the Post Office is a notable exception).

Industry-standard early redemption penalties are one month's interest for early repayment of a loan where the original term was 12 months, and 58 days' interest for loans with a repayment term of more than 12 months.

Source: ' Guardian '

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