Taking out a personal loan used to be straightforward, but with today’s tighter lending criteria and shrinking credit market, it has become increasingly difficult. In fact, if you're looking to pay for a car, wedding, or to consolidate your debts, you could find it hard to get a good deal, or even to get a loan at all.
Rates are rising
Not only has the number of lenders offering unsecured loans fallen sharply, but those who still do have put their rates up. Rising unemployment means the risk of customers defaulting has increased, so nervous providers have put prices up to cover potential losses.
Advertised rate
Of those borrowers that are successful, lenders are obliged to offer their ‘typical’ rate to just two thirds. The remaining third – regarded by lenders as more risky - may find they’re only offered a higher-interest loan.
Risk-based pricing
At the same time, fear of bad debts has also made lenders very selective about who they lend to, and a large number have moved to a practice known as risk-based pricing. This cherry-picking process means the rate you get depends on your credit rating - with the best deals reserved for those with perfect credit scores.
Loyalty is king in loans market
Most high street banks will now only offer prime unsecured loans to existing customers - thereby reducing the risk. Nationwide Building Society recently reduced the annual percentage rate (APR) to 7.7% for personal loans of £5,000-£14,999 – but only to FlexAccount customers.
Best buys
While the Nationwide rate is one of the lowest currently on offer, if you have a good credit score, there are still providers offering unsecured loans that won't break the bank. For a £5,000 loan over three years, Sainsburys Finance has a rate of 7.9%, while Tesco Personal Finance has a rate of 8.7%, and Alliance & Leicester has a rate of 8.9%.
Larger loan
If you're after a £10,000 loan, Tesco is offering a rate of 7.9%, while Marks & Spencer Money has a rate of 8.7%. M&S has also just extended its cashback reward offer to all loans over three years, giving customers a refund of 10% of the interest they have paid once their final repayment has been made.
Shop around
If you're on a tight budget, a personal loan could be right for you as interest rates are fixed, so you know exactly how much you will pay – but watch out for early redemption penalties. While the key to getting the best rate is to shop around, avoid taking a scattergun approach to applying for a loan, as too many loan applications could have a negative impact on your credit rating.
If you’re after a loan at a great rate, Confused.com can point you in the right direction.
*Rates correct as of 17/08/09
