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Loans & Credit

Money Insider: Don't dismiss peer-to-peer options for personal loans

Even though the base rate has been stuck fast at 0.5 per cent for the past 27 months, the interest rate charged by banks and building societies for personal loans is at the highest level for over a decade.

If you're in the market for a larger loan of between £7,500 and £15,000 the average rate is currently 8.6 per cent, and for those seeking a smaller loan of £3,000 the average rate is a wallet-crunching 19.1 per cent.

Lenders will argue that the processing and administration costs are the same whatever the size of the loan, but the profit margin on lower value and shorter-term loans is much smaller, hence the higher rates levied.

Other lenders claim that the default and non-payment rate on loans of £2,000 to £3,000 tends to be greater than for bigger loans and this is also factored into the pricing.

So if you're looking to finance your new car purchase or refit the kitchen, where do you go for a low-cost loan?

The best loan rates I could find on the high street this week were 6.8 per cent from Nationwide Building Society for a loan of £7,500 and above or 12.9 per cent from Sainsbury's Finance if you're in the market for a smaller sum of £3,000.

If you're looking for £3,000 or less, your best option may be a credit card offering a promotional deal for interest-free purchases. As long as your credit record is in good nick and you get allocated a big enough credit limit, you can borrow at 0 per cent for up to 15 months on new purchases with credit cards from Marks and Spencer Money or Tesco Bank.

These days, however there are other less-traditional borrowing alternatives in the form of peer-to-peer lending sites such as Zopa and RateSetter.

The rates on Zopa change on a daily basis, but when I checked on Monday it was quoting just 9.9 per cent for a £3,000 loan over five years and that included the one-off lending fee of £130, a deal that easily beat the rate being offered by mainstream lenders. On the other hand the Zopa rate for a loan of £7,500 was not quite so competitive and slightly above the market average at 8.9 per cent.

With all personal loans the rate advertised must be given to at least 51 per cent of successful applicants, usually those with the very best credit record. If your credit file is less than perfect you may find that you end up paying a higher rate on your borrowing as the lender could assess you as a higher risk.

So next time you're looking for an unsecured personal loan, don't just rely on your own bank – make sure you check out the full range of options.

Rates fall again on five-year mortgages

swap rates have been slipping and are down by 0.25 of one per cent in the last month with these reductions now being reflected in cheaper mortgages.

There have been lower rates across all fixed terms, but a couple of the best examples I've seen in the last couple of weeks have been in the five-year fixed market.

If you're a first-time buyer, your choice of mortgages is normally quite narrow, usually restricted to variable rate or fixed terms of just two or three years.

However, Coventry Building Society has just launched a new five-year fixed-rate mortgage for loans of up to 90 per cent loan to value. This new product comes with a competitive rate of 5.99 per cent and a low fee of just £199.

For first-time buyers the security of a fixed monthly repayment is a key requirement and helps with budgeting in those costly early years of home ownership. The new Coventry BS mortgage offers excellent flexibility with unlimited overpayments allowed, plus the ability to move to a different product at any time without having to pay an early repayment charge.

I think a five-year mortgage, with such flexibility, is an ideal product for the first-time buyer segment. It's possible to get a similar rate with other lenders for a two-year fixed-term, but with interest rates predicted to rise next year, you could be faced with a hike in repayments when your short-term deal comes to an end.

For borrowers with a larger deposit, there was good news in the form of a five-year fix at 3.99 per cent from Yorkshire Building Society (pictured). The rate is available for advances to 75 per cent LTV and comes with a fee of £995. For borrowers who want to reduce their upfront costs there is an alternative deal at 4.39 per cent and a £95 fee, with both options available as an offset mortgage if you want it.

Andrew Hagger – Moneynet.co.uk