Keep racking up the debt and then pay less interest: that's life for the chosen few
While many people will be rejected for credit as the banks get tough, others may find they are rewarded for borrowing more. Emma Lunn reports
Sunday 27 January 2008
The more money you borrow, the cheaper it could be. It might not be moral, but this is the startling reality unearthed by a new study.
A review of the personal loans market by research firm Defaqto reveals that in some circumstances borrowers could end up paying less each month by taking out slightly larger sums with the same lender.
The anomaly arises because of the way most lenders structure their deals, which differ according to the "tier" that the loan size falls into. Generally, a higher interest rate is charged on the lowest tiers, and rates then decrease as the amount borrowed increases. In some cases, borrowing just £1 more can drastically reduce the amount you pay back.
For example, if you were advanced £4,999 by Lombard Direct, the typical annual percentage rate (APR) would be 15.9 per cent and you would have to pay back £7,117.20 over five years. But if you borrowed an extra £1, the typical APR would drop to 7.9 per cent and the total repayments over five years would be only £6,034.80 – a saving of £1,082.40.
Similarly, a loan of £4,999 arranged on the internet with Direct Line would cost you £7,117.20 over five years, whereas by borrowing £5,000 you would pay only £6,101.40 during the same period – a saving of £1,015.80.
Defaqto consultant David Black comments: "Borrowers should take care when choosing the size of loan they want, because a little effort in researching the interest rates charged on different tier levels could save them a considerable amount of money."
However, following the credit crunch, only borrowers with impeccable credit ratings are likely to be accepted for the most competitively priced loans. Price-comparison site Moneysupermarket.com warns that people could struggle to get good deals on loans as banks get tougher with their lending criteria.
Tim Moss, head of loans at Moneysupermarket, says: "Loan acceptance rates are decreasing, showing that now, more than ever, pro- viders are looking for lower-risk customers to help reduce the chances of having bad debts on their books.
He adds: "The trouble now is that people with near-spotless credit records are finding it difficult to get a loan, or are only being offered one at a higher rate."
It is argued in some quarters that a clampdown on easy borrowing is long overdue in light of the high debt levels in the UK. Credit Action, the independent money-education charity, says the average household debt, excluding mortgages, currently stands at £8,956 and is on the increase.
However, the Banking Code, the voluntary set of standards for the industry, is designed to make sure that banks do not lend to people who could not afford to repay the debt.
Adrian Lloyd, spokes-man for the Banking Code Standards Board, says: "Under the code there is a commitment for all the banks and building societies that are signed up to it to demonstrate responsible lending. If things do go wrong and people get into financial difficulties, then our code also says quite a lot about how to handle cases of financial difficulty under the general heading that people must be treated sympathetically and positively."
For borrowers who already have a loan – and who enjoy a credit rating that will make them eligible for another one – there are often benefits to be exploited by switching mid-term. "Best buy" loans are currently priced at around 6.5 per cent, while the average loan rate is nearer 11 per cent. According to the price-comparison site uSwitch.-com, consumers with an £8,000 loan taken out over five years could save an average of £180 by transferring to a best-buy deal halfway through.
Switching is not as difficult as some people might think. One in four loan providers allow consumers to move loans without any penalty, and 67 per cent charge just one month's interest – an average of £39.
Mike Naylor at uSwitch says five years is a long time to stick with the same provider as rates fluctuate constantly. "For example, in the second half of 2007, more than 30 providers increased loan rates by around 1 per cent APR," he says. "However, since the last base rate cut at the beginning of December, eight major lenders have already cut their rates by up to 5.5 per cent APR.
"With more base rate decreases predicted over the next 12 months," he adds, "it's possible that we may see other providers following this example and offering more competitive deals than those that were available last year."
Some borrowers might be better off bypassing the traditional banks and lending institutions in favour of individual loans. According to Zopa – launched in 2005 as the first peer-to-peer lending website – more people could be borrowing money from strangers this year because of the increasingly stringent criteria applied by the banks.
Zopa (Zone of Possible Agreement), is an online market where people meet to lend and borrow money. Borrowers are generally offered competitive rates, normally around 7 per cent for a £3,000 loan repaid over three years, while lenders receive an average of 7 per cent return on their money.
On Zopa, all borrowers are identity-checked, credit scored and risk-assessed, and anybody lending £500 or more has their money spread across at least 50 borrowers. The default rate since launch has been low, at 0.2 per cent.
Wherever you go for a personal loan, there are several factors to take into account as well as the APR. For example, some loans charge a penalty if you want to repay them early, while others automatically add on the cost of payment protection insurance. PPI is rarely considered the best solution for consumers' needs, and even if you do want it, your lender's cover isn't usually the cheapest.
- 1 Nigel Farage: Me vs Russell Brand on Question Time – he's got the chest hair but where are his ideas?
- 2 Harry Potter fans can apply to the Hogwarts-inspired College of Wizardry
- 3 Jessica Chambers: 19-year-old woman 'doused with lighter fluid and burned alive' in the US
- 4 Russell Brand calls Nigel Farage 'poundshop Enoch Powell' in BBC Question Time debate
- 5 Orange Wednesdays are no more
Disgruntled RBS worker writes hilarious open letter to Russell Brand after anti-capitalist publicity stunt leaves him hungry
Nigel Farage's approval rating hits 'record low' as popularity suffers in wake of Ukip sex scandal
Nigel Farage defends Kerry Smith 'ch***y' comment: 'If you are going for a Chinese, what do you say you’re going for?'
Pakistan school attack live: Taliban kill at least 132 children in 'horrifying' massacre
Sony hack: Angelina Jolie branded 'seriously out of her mind' in further embarrassing leaked email saga
Panic Saturday: 13 million Britons spend £1.2bn – while 13 million others across the country live in poverty unable to afford food
iJobs Money & Business
$200 - $350 per annum: Carlton Senior Appointments: Managing Producer Office...
$125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...
Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...
Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...
Day In a Page
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens