The New Year is a good time to take stock of your finances and an unsecured personal loan could be a good way of consolidating your store card or other debts, or to pay for a large purchase and save money. According to Moneysupermarket.com average loan rates for amounts of between £7,500 and £15,000 are at their lowest levels since November 2008. However borrowing smaller amounts is actually more expensive than it was in 2008. An unsecured loan could mean you pay less interest and your debts will be cleared in a set period, say, three to five years.
Possibly signaling the start of an interest rate war Nationwide and Santander are now both offering unsecured loans of £7,500 to £15,000 at the low rate of 7.3% APR typical (available through www.moneysupermarket.com only). Nationwide bank account customers can get a loan as low as 7.2%. Several other loan companies have also cut their loan rates in the last month.
Graham Pilkington from Nationwide, said: ‘With economic conditions remaining tough, our new personal loan rate is a great start to the New Year, especially for those people who want to consolidate those debts accumulated in the run up to Christmas’.
The main benefit of an unsecured loan is that the interest rate is fixed for the life of the loan and at the end of the loan the money you borrowed is paid off in full. Although there are good rates available for unsecured loans most companies use risk-based pricing to decide what interest rate to charge you. This means you may not get the advertised rate as just two thirds of applicants accepted for the loan will get the advertised rate or lower.
You should also watch out for early repayment penalties on unsecured loans as most will charge you a penalty of one or two month’s interest if you pay the money back early. Before taking out a loan you must also consider if you really need to borrow the money. For example, if you have a credit card debt you could take advantage of a 0 per cent balance transfer deal – you could pay no interest for up to 17 months in return for a transfer fee of 2.9 per cent with Barclaycard, for example. If you have savings it makes sense to use them to pay off your credit card or loan debts as the interest rate you will pay on your debts will be much higher than the interest you will earn on your savings. However you should make sure you keep some savings to use in emergencies, this should be between three and six months of your salary.
Over the next year we will find out what impact the government’s cuts on public spending will have on the economy. Worrying research from Scottish Provident this week in its Financial Safety report reveals that people only consider that they are in financial difficulties if they owe around £16,000. Susan Barclay, from Scottish Provident, said: ‘For people not to think they are in serious financial difficulties until they reach debt levels of over £15,837 is a worry, and underlines how debt has become too readily accepted in the UK.’