How to secure the cheapest loan rate

The base rate may be at an all-time low, but the cost of borrowing hasn’t kept in line. In fact, the cost of borrowing is rising and is set to get even more expensive as the months go on.

Experts predict that the average unsecured loan will have an APR of 10% by the summer.

A year ago, when the base rate was 5.25%, a £7,000 loan typically cost 6.9% – a difference of only 1.65%. Now with base rate just 0.5%, the cheapest rates for the same-size loan cost around 8.5% on average, making the lenders a whopping great margin of 8%.

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The reason for the hike comes down to a combination of factors. The current economic crisis is one and it’s coupled with the fact that regulators have clamped down on the old lenders’ cash-cow: payment protection insurance.

The profit lenders made on selling products tied in with the loans meant they could afford to reduce the rates on the loans they offered to entice borrowers in the first place. Now they’ve had to go back to basics and simply make the profit out of the money they’re lending, and not out of the expensive (and for many borrowers, worthless) insurance products sold with them.

Tim Moss, head of savings at Moneysupermarket.com, says: “Rates are going up on a daily basis. It’s the lenders’ reaction to the severe restrictions being introduced by regulators on the way payment protection insurance is sold.”

So, if you’re looking for a loan, the advice is to secure one now before rates climb any higher. But there’s a double whammy for anyone wanting to lock into a low rate. Firstly there’s the tier system that most lenders use nowadays and secondly there’s the aftermath of the credit crunch.

Mind the gap
Picture this. You see a lender offering rates ‘as low as 6.9%’. Sounds good. But, the chances are that the rate you’ll be offered is as high as 15%.

Why? Two reasons. First of all lenders are tiering their rates, so someone borrowing £10,000 may well be able to secure that 6.9% rate, but ask to borrow just £3,000 and the rate charged can more than double.

Then there’s the question of your ‘suitability’ as a borrower. Borrowing used to be much easier before the credit crunch. Now, unless your credit rating is squeaky clean, you’re in a job that the lender thinks won’t disappear tomorrow (a tough one to call in this market) and you have a high income, you probably won’t get the preferential rate anyway – whether you want £10,000 or more.

Watchdog on the prowl
The Office of Fair Trading is on to lenders that quote low rates on unsecured personal loans that are then only offered to just a handful of their top customers. The rules state that when lenders advertise a personal loan, the rate quoted has to be offered to two-thirds of customers who apply.

However, following customer complaints that these rates are almost impossible to get and customers are in reality being charged far higher rates, the situation is now being investigated. It’s likely to be some time before we get any more from the OFT on it. In the meantime, how can you make sure you get the most competitive rate?

How to secure the best rate
First of all you need to have an impeccable credit rating and borrowing history. So get hold of a copy of your credit file and make sure there is nothing erroneous on that could hamper your attempts to get a competitive rate.

For borrowers with a spotless credit rating
If you have a clean credit record the next step is to make sure you read the small print and ensure the loan amount you are asking for qualifies for the most competitive rate. Take Tesco. It currently offers loans with an APR of 8% for loans between £7,500 and £15,000.

Borrow just £7,000 instead and the rate rises to 8.9% and if you only want to borrow £3,000 you’re looking at a hefty rate of 15.9%, practically double the headline grabbing rate advertised.

Lisa Taylor from Moneyfacts, says: “Almost all personal loan providers have adopted a tier-based pricing structure, offering lower rates for larger advances. In many cases, the difference between the highest and lowest rates can be considerable, often double and in some cases over three times as much”.

Read the terms carefully and, if you are borrowing an amount just below one of these bands, it could actually work out cheaper to increase the amount you borrow to benefit from the more attractive rate.

Video: “Typical rates” explained

If you’re less than squeaky-clean…
If your credit history has some black marks on it or there’s a county court judgment lurking somewhere in your past, getting the most competitive deal is not really going to be an option. But you can still make sure you get as competitive a deal as you can, by shopping around.

Loan rates for people with adverse credit records vary from 7.9% right up to a whopping 50.4%. You really need to do your homework and shop around to truly get the best rate.

And, if you find it impossible to secure a competitive deal then your only sensible option may be to forget about borrowing for the time-being.

By Emma-Lou Montgomery

Payday Loans UK

Payday Advance UK