With loans, the devil is always in the detail
Borrowing money? Read the small print, and don't be swayed by 'free' cash offers
Saturday 13 October 2007
The cost of taking out a personal loan has been on the rise over the past month, as the credit crisis has forced banks to raise their interest rates. But consumers were finally given some respite from the spiralling cost of borrowing this week, as Barclays bullishly slashed its rates, claiming its financial strength meant it was much better positioned than its competitors to weather the current crisis.
Rates on Barclays loans have been cut by as much as 0.6 percentage points, down from a typical APR of 7.4 per cent to 6.8 per cent. The bank is also promising to pay any difference between monthly repayments – plus an extra £1 per month – for those who take out one of its loans and then go on to find a cheaper deal elsewhere. It also says it will pay £50 to those who consolidate their debts with Barclays.
However, customers might be advised to take the bank's PR spin with a generous pinch of salt. Tim Moss, head of loans at Moneysupermarket.com, says: "There are still around six providers with better rates, so Barclays has some work to do live up to its own publicity. Also, the £50 incentive to swap your loan may be tempting, but I'd advise caution before taking the plunge. Check the small print on any current loan agreement for early settlement penalties, which could well be more than £50."
If you are trying to bag the free £50, it's worth remembering that you'll have to apply in writing, fill out a special form and supply a written offer of the better deal you found – all of which is designed to make it more trouble than it's worth.
All in all, the move seems less about offering the most competitive rate to customers and more about boosting their reputation by capitalising on the current uncertainty surrounding other institutions. Still, Barclays' rate cut remains a positive move in a market where overall rates are increasing.
Lisa Taylor, analyst at Moneyfacts.co.uk, says around nine providers have recently hiked interest rates and, on some borrowing brackets, by up to a whopping 4 per cent: "With increasing uncertainty in the financial markets, rising levels of bad debt and a year of interest-rate rises putting pressure on our disposable incomes, it comes as no surprise to see lenders increasing their lending margins in what has become a far more risky environment to do business," she says.
Generally speaking, experts advise caution for those shopping around for the best unsecured loan deals and not just at this time of uncertainty. When searching the market, bear in mind the impact how much you want to borrow might have; typically, the smaller the amount you wish to borrow, the higher the rate providers might levy.
"Stay away from looking at typical rates," advises Ms Taylor. "The big posters in the branch windows might grab your attention, but remain cynical."
When you see the "typical APR" on marketing material this means that while at least 66 per cent of those who are offered a loan will get that rate, more than a third of applicants will be offered a higher rate.
And if you don't like the rate you're offered, and decide to apply elsewhere, it's worth remembering that making multiple applications for credit will bring down your credit rating.
To minimise this damage, Mr Moss suggests a three-pronged approach: " Check your credit records first with one of the credit reference agencies, such as Equifax or Experian; it only costs a few pounds and will give you an idea of what loan providers see when they check your score," he says. "There could be old linked addresses on there which may bring your score down. Make sure the electoral roll is up to date in this respect; which might help clean up your records. Finally, don't employ a scatter-gun approach to getting credit and send off lots of applications simultaneously."
As well as the risk of losing out by chasing eye-catching typical APR offers, loan applicants should be aware of other caveats and conditions, which can include loans only being available to either new or existing customers of a provider. Other providers will demand that applicants are homeowners – even if the loan is unsecured.
One other factor to watch out for when choosing a personal loan is payment protection insurance, which is designed to cover the cost of repaying your debt in the event of being out of work having either had an accident, becoming seriously ill, or being unemployed involuntarily.
While providers have been forced to clean up their act in terms of selling this protection more carefully, consumers need to stay vigilant and avoid shelling out for cover they don't want.
If you do want payment protection insurance, then go to an independent provider – not the company your loan is with. Stand-alone protection policies from companies such as www.paymentcare.co.uk are often a much cheaper option.
When you're buying a policy, watch out for the myriad of clauses and caveats which could invalidate any claim. These might include pre-existing medical conditions or being self-employed.
For those thinking they might be in need of a cash injection from a personal loan, the advice is, don't delay. Experts maintain that the overall trend is for rates to continue to go up, and those providers coming out with aggressively priced products are likely to have finite tranches of cash available to offer loans at such competitive rates.
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