Credit’s not so easy anymore
Not only have personal loan rates increased by an average of 1.7%* over the past year, lenders have also made some significant changes to the way that they offer these products. Samantha Owens, Head of Personal Finance at Moneyfacts.co.uk investigates:
Product changes
“Unsurprisingly the personal loan market has not escaped the effects of the credit crunch. In 2008 alone we have seen 27 changes to personal loan products.
“In the majority of cases, these have been increases across the board, with lenders combining large one off rate increases with gradual small rises the overall effect does not favour consumers looking for extra borrowing.
“Anyone who takes out a £5K personal loan over three years will find themselves paying up to £386 more than if they had taken out the same loan at the same time last year.
Lender |
Total repaid on a £5K loan over 3 years in March 2007 |
Total repaid on a £5K loan over 3 years in March 2008 |
Increase |
Black Horse |
£5,927.04 |
£6,312.96 |
£385.92 |
Cheshire BS |
£5,536.08 |
£5,811.12 |
£275.04 |
Derbyshire BS |
£5,540.40 |
£5,811.12 |
£270.72 |
Smile |
£5,555.88 |
£5,811.12 |
£255.24 |
Co-operative Bank |
£5,555.88 |
£5,811.12 |
£255.24 |
Withdrawals
“But it is not only the mortgage market where we are seeing product withdrawals. In the last 12 months we have seen 12 lenders drop out of the personal loan market. These were a combination of new lenders and some well known institutions, as shown below.
Eskimo Loans |
Leeds BS |
MBNA Europe Bank |
RAC Financial Services |
GE Money |
LV= |
Morgan Stanley |
Virgin Money |
Hanley Economic BS |
Mansfield BS |
Norwich Union |
Goldfish |
The more you borrow the more you pay
“Lenders also seem to be clamping down on those who borrow more. Traditionally the more you borrow on a personal loan the lower the APR. More recently however, we have seen lenders increasing the rate offered on the higher loans. In some cases, as seen below, the rate on the higher tier has actually gone above that of the tier below.
“This change is another way lenders are tightening up, ensuring that we only borrow as much as we need, not a penny more.
Lender |
Tier |
Rate APR |
|
Moneyback Bank |
£3K |
£4,999 |
8.1% |
|
£5K |
£7,499 |
7.4% |
|
£7.5K |
£15K |
6.9% |
|
£15,001 |
£20K |
7.1% |
Nationwide BS |
£1K |
£2,999 |
16.4% |
|
£3K |
£4,999 |
14.9% |
|
£5K |
£7,499 |
9.9% |
|
£7.5K |
£14,999 |
7.9% |
|
£15K |
£25K |
9.4% |
Tesco Personal Finance |
£3K |
£4,999 |
15.9% |
|
£5K |
£7,499 |
9.9% |
|
£7.5K |
£19,999 |
6.8% |
|
£20K |
£25K |
7.9% |
Personal pricing and credit rating
“Over the last year we have seen lenders reassessing how they offer personal loans too, with more and more lenders adopting personal pricing or a credit rating assessment.
“This is not necessarily bad news for the borrower. Whereas before a prospective borrower was either accepted or declined, now those lenders that offer an APR dependent on a credit rating will offer an alternative rate to those borrowers who otherwise could have been declined.
“But what it does mean is that it is increasingly difficult to work out what the best deal is. If you look at our best buys for example, from the top six rates offered on £5K over three years, four are dependent on credit rating. According to the industry standard, only 66% of applicants have to be offered this rate, effectively leaving those with poorer credit ratings with higher rates.
“This amendment is yet another sign that we are all too dependent on borrowing and are willing to accept a higher rate to ensure we get the funds.”
* Based on a £5K loan over three years
Moneyfacts Group
Moneyfacts is the UK’s leading independent provider of personal financial information and our data is used and trusted throughout the financial industry.
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