Personal loan rates on a £10,000 borrowing hit a 10-year low

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Britons looking to borrow to finance a new car, renovations or a major life event like a wedding will now find that borrowing a substantial sum is cheaper than ever.

A £10,000 personal loan repaid over five years came in at an average APR of just 4.5 per cent this month, down 0.2 percentage point from November, data from Moneyfacts shows.

Five years ago, in December 2014, the average rate was 5.7 percent, a decade ago it was 9.5 percent.

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That means borrowing £10,000 and paying it back over five years would cost you £1,161.20 now, £315 cheaper than in 2014.

The fall in personal loan rates is rare good news for those looking for credit, as banks recently announced overdraft increases to nearly 40 percent and credit card issuers are reducing the generosity of their deals.

The average annual interest rate on the credit card is now 25.1 percent. If you had £2,500 on a credit card at this APR and paid out £100 each month, it would take you two years and 11 months to pay off the balance in full and you would accrue £911 in interest.

And while the average personal loan rate is 4.5 per cent, five providers will lend you £10,000 over five years at an interest rate of under 3 per cent.

They are Cahoot, Nationwide Building Society, John Lewis, Sainsbury’s Bank and Tesco Bank.

Cahoot offers the cheapest interest rate of 2.8 per cent which means it would cost you £718.40 over the life of the loan.

Meanwhile, the cheapest credit cards all cost you more than twice as much as 3 percent at the moment. The Co-op Bank offers the lowest APR for their 3-year fixed rate visa at 6.9 percent.

How personal loan rates have fallen over the past decade
Year Average APR on a £10,000 loan repaid over 5 years
2009 9.5%
2014 5.7%
2016 4.9%
2017 4.6%
2018 4.7%
2019 4.5%
Source: Moneyfacts

Next up is TSB’s Advance Mastercard, which comes with 0 percent on purchases for a three-month introductory period and has an APR of 7.9 percent.

Moneyfacts’ Rachel Springall said: “It is encouraging to see that the unsecured personal loan market is still buoyant and rates have fallen over the past quarter.

‘This improvement in the credit market could be encouraging for borrowers considering debt consolidation either now or in the new year.’

Given the length of time and the level of creditworthiness, personal loans are more likely to be used for purchases such as a new car – as an alternative to car loans – or for one-off purchases or even as a consolidation loan to pay off existing debt.

They could also be popular with those who, rather than moving home due to elections and Brexit-related instability, would instead like to make big improvements to where they currently live.

With that in mind, given the amount of capital required to carry out such projects, personal loans are probably the cheapest source of funding.

Finally, the cheap interest rates could also make personal loans a more attractive alternative to auto financing options if you’re accepted for one.

For example, a new £15,995 Ford Fiesta would cost you a lot less with a loan from Cahoot than it would with Ford’s own car financing.

A new Ford Fiesta would cost you £15,995, but falling personal loan rates mean it would be cheaper to use than Ford's own financing

A new Ford Fiesta would cost you £15,995, but falling personal loan rates mean it would be cheaper to use than Ford’s own financing

Buying a Ford Fiesta for 48 months with Ford's Acquire financing would earn you an APR of 7.4%.  The cheapest personal loan for the same amount in the same period is only 2.8%

Buying a Ford Fiesta for 48 months with Ford’s Acquire financing would earn you an APR of 7.4%. The cheapest personal loan for the same amount in the same period is only 2.8%

Ford’s Acquire finance, which requires you to pay a deposit and make monthly payments to own the car, would cost you £2,130.45 over 48 months if you were to buy a new one with a £1,000 deposit Ford Fiesta combined – a rate of 7.4 percent APR.

You would therefore end up paying just over £17,000 for the car.

If you use Cahoot to borrow £16,000 over the same 48-month term, you would only pay £919.52 on top of the amount repaid.

Rachel added, “Although the lowest lending rate is less than 3 percent, it is important that borrowers are aware that only 51 percent of successful applicants are required to be offered the advertised APR on an unsecured personal loan, but these are not guaranteed.”

“To help borrowers, it would be wise to review their credit reports and check for errors before applying.

“Borrowers who want to take advantage of the lowest interest rates may only be able to apply online or by phone.

“You’re unlikely to find lower interest rates at your current bank, so it’s important to consider alternative unsecured personal loan brands.”

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