The loans that make you pay for freedom

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The Independent Online

You could be excused for not knowing what a flexible loan is: lenders themselves can't seem to agree. Cahoot brands its product as a hybrid of credit card and fixed-rate loan, while rival HSBC calls its a de facto overdraft.

What is clear, however, is that only a handful of banks bother to provide flexible loans. They are the black sheep of the personal loan industry, largely unloved by consumers and lenders alike. This is surprising, seeing as flexible features are bound to make any financial product more appealing.

"Flexible loans allow you to underpay each month if you're going through a bit of a lean period, or overpay with a lump sum to reduce the debt," says Philippa Gee of independent financial adviser (IFA) Torquil Clark. "They suit the self-employed or somebody whose monthly income can err towards the erratic."

And unlike fixed-rate deals, they carry no penalty for paying the whole loan off early.

An elastic limit on the amount you can borrow means you can agree a loan of £5,000, say, but "draw down" only £2,000. You will be charged interest on this sum, while the remaining £3,000 will remain on standby at no charge until you need it. You are under no obligation to borrow the full £5,000, but if you need emergency funds, you can usually extend this limit.

So what's the downside? Such freedom comes at a price. Flexible loans carry higher, variable annual percentage rates (APRs) that move up and down in line with the Bank of England base rate, making interest payments unpredictable.

A glance at Moneyfacts' list of seven major lenders offering flexible loans shows APRs at an eye-watering 18.9 on products from First Direct and Marks & Spencer. Less expensive is Barclays Bank's deal, currently set at 11.9 per cent, while Cahoot's "sale-price" loan has an APR of 6.9.

Although interest rates are widely believed to be close to the peak of their current cycle, even the smallest rate rise will make interest payments more expensive.

"If you had taken out a loan 12 months ago [when the Bank of England base rate was at 3.5 per cent], you'd now face much higher interest payments," Ms Gee points out.

The minimum monthly repayment on flexible loans varies between lenders. Cahoot demands either 1.75 per cent of the loan or £50 (whichever is the greater). M&S Money charges either 3 per cent or £5.

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