First Direct has started a loans war as it has launched a new range of super-sized unsecured loans up to £50,000. There is no requirement to secure the loan against anything, and in previous years, such an amount would only be possible via a re-mortgage product.
The banks previous maximum unsecured loan amount was £30,000, which was well under the likes of Tesco’s at £35,000 and Sainsbury’s at £40,000. However, the interest charges are not as favourable as perhaps an alternative financial product offered by the bank. The typical rate charged is 6.7%, which is double the 3.4% that First Direct charge on unsecured loans under £30,000. It is also significantly more than the typical mortgage interest which is around 3.5%. So for someone borrowing the maximum £50,000 over the maximum term which is 7 years, the repayments would be £743.45 per month,
It is likely that other lenders will now follow suit in the ultra-competitive unsecured loans market. Andrew Hagger of Moneycomms.com. said “It could be that it is used by people who are renting, or by people who are happy to pay more so they don’t have to jump through the hoops to remortgage; however, you have to be one of their customers to apply, so they will know quite a lot about you.” Critics also fear that such a loans boom, together with personal contract plans for vehicle purchases (PCPs), will add to soaring levels of personal debt.
In another twist, Ikano Bank, Ikeas finance arm, this week launched the cheapest unsecured loan rate in the UK at 3.1%, again ramping up the war between lenders. Sainsbury’s bank does offer a 3.1% loan but only to Nectar Card holders, other customers are offered a 3.2% rate. The Ikano deal is applicable to those who borrow between £7,500-£15,000, and means that someone borrowing the maximum £15,000 over a 5 year period will pay back £269.91 per month.
How likely though, are would be borrowers, in obtaining these ultra-low rates? Lenders are very god at advertising “representative rates”, and only 51% of applicants have to be offered the rates advertised to comply with advertising rules. Meaning therefore, that as many as 49% of people could end up with a much higher rate of interest, or be rejected altogether.
Data from Moneyfacts.co.uk confirms that realistically someone with a fair credit rating is likely to be offered around 14.9%, and someone with a bad credit rating is unlikely to be offered a deal below 37.9%. Most lenders provide tools and loan calculators to enable potential borrowers to estimate monthly costs, but the only way to know if you are eligible for the lowest advertised rates is to apply. In reality, if you have adverse, bad or poor marks on your credit file then it is virtually impossible to obtain the lowest advertised rates.