As unsecured loans rates reach new low, is this the best time to borrow?

Less than a month after the Bank of England confirmed that unsecured loans rates have reached their lowest level since records began, Sainsbury’s became the latest lender to cut the cost.  The supermarket now offers a 3.5% rate for nectar cards holders, on all loans from £7,500-£15, ooo over three years.  The 0.1% cut is now lower than the 3.6% rate offered by First Direct, M&S and Nationwide for similar size loans.

Neil Faulkner, founder of peer-to-peer lending comparison site, believes that this is being driven by “ferocious competition for the best borrowers from peer-to-peer lenders”  However Andrew Hagger of believes that the direction of the market is about to change stating; “Lenders are just tinkering by cutting the odd 0.1% here and there. I think we are very close to bottoming out, as rumblings about a base rate increase start to get louder.”

Therefore, now is the cheapest time to borrow, but where can you find the best deals?

If you know that you’ll be able to repay your debt within two years a 0% credit card is likely to be a cheaper and more flexible route than considering  unsecured loans.  It’s flexible as you can make smaller monthly repayments, and there are no penalties if you wish to clear the debt early.  The borrowing is also interest free.

The current market-leading card, the Matched credit card from the Post Office, allows you to borrow at 0% interest for 25 months, before reverting to a typical 18.9% APR. However, a “soft credit search” using the eligibility calculator, confirmed that even when tested on an applicant with excellent credit, working full time earning £100,000 a year only 70% of applicants would be successful.

Virgin Moneys All Round card however has a 95% approval rate based on the same applicant, and offers 0% purchases for 24months. It also had an 80% approval rate for applicant with an equally clean credit record on a £25,000 salary.

Most credit cards will only offer initial £5,000 limits, even to the most creditworthy and affluent, so it will be difficult to know your credit limit before you apply.  Try to keep your credit record clean, and if you don’t manage to repay your balance before the interest-free period expires, you will need to apply for another 0% card, and transfer the balance.  However these typically charge a 3% fee so needs careful consideration.

A few credit card providers will also pay money directly into your current account from the card.  This again however incurs a fee the cheapest at 1.99% is with MBNA Platinum over 2 years, and 2.99% over 3 years.  This means you could transfer £3,000 from the card to your bank account. As long as you pay it back within three years it would only cost £90. If you compared this to Barclays where a £3,000 personal loan over 3 years at 22.9% would cost you £1058.

For larger amounts of borrowing, up to £7,500 Peer-to-peer lender Zopa and Japanese bank Hitachi offer the best deals. Both offer a typical APR of 4.4% on personal loans over 5 years.  Thus meaning it would cost you £572 to borrow £5,000 and £847 for £7,400.

If you want to borrow more the rates become more competitive, and the market leader here is Sainsbury’s bank.  They are offering a 3.5% rate to all Nectar card holders (they are free to take out), over a maximum 3 year period.  For those wanting to borrow over a longer period then Sainsbury’s, Cahoot, First Direct, Nationwide and M&S Bank all offer five-year loans at a typical APR of 3.6%. £7,500 over five years at this rate would cost £694, while £10,000 would be £926.

It’s worth noting therefore that borrowing £7,400 at 4.4% will cost £874, whilst £7,500 at 3.6% will be just £694.  This is as a result of the high competitiveness in the higher unsecured loan amount bracket.

For those wanting to borrow £15,000 upwards usually at this level most would approach their mortgage providers and look to secure the funds against their home. But you are putting your home at risk. There are also greater upfront costs because mortgage lenders charge arrangement and booking fees which loan providers do not.  Although the choice is less at this level, there are still a few lenders willing to go above £15,000 and rates remain competitive.

First Direct will lend up to £25,00p at 3.6% APR over a maximum of 7 years to its current account holders. This would be a repayment of £337 a month, and the total charge would be £3,301.

In comparison, adding a £25,000 loan to an existing mortgage on a variable rate of, say, 2.5% with 15 years remaining would be just £167 a month, so a much lower monthly repayment. However, you’ll end up paying £5,006 in interest, plus any applicable upfront fees.  It is also more difficult than you may think to increase the size of your mortgage borrowing. New rules which came into force last year require lenders to carry out a “stress test” on how you manage repayments if interest rates rise, and many applicants find the process lengthy and stressful.  Ray Boulger of broker John Charcol said “anyone with an interest-only mortgage may find it difficult to increase it without converting to repayment.”

In conclusion therefore whatever method works for you, there are now more competitive options than ever before.  Check out deals online and especially broker deals that have extensive panels of lenders, who can help applicants with less than perfect credit.