Small personal loans can cost up to 130% more as banks hike charges for lower amounts

News - Banking

Written by Ray Clancy

Thursday, 08 April 2010 10:00

Borrowers looking for a personal loan of less than five thousand pounds could pay up to 130% more than they would have four years ago, it is claimed.

While loans over £7,000 remain competitive, those below £5,000 have rocketed in price, according to research moneysupermarket.com. This is despite Bank of England base rate falling 4% since 2006.

Four years ago the top 10 average rates for loans of £3,000 was 6.49% APR which equated to £309 interest over three years. Today’s average is currently 14.92% APR, an increase of 130% which means customers pay back more than double the amount of interest, says the research.

For loans of £5,000 the top 10 average rate was 5.83% in 2006 while today it is 10.84%, an increase of 86% and the gap between lower tiered loans and the higher amounts is growing. Until April 2008 the correlation between tiers was very similar, but now there’s a 5.8% APR difference between loans of £3,000 and £15,000.

Tim Moss, head of loans and debt at moneysupermarket.com, blames the banks. ‘Following the Financial Services Authority’s decision last year to ban providers from selling single premium payment protection insurance on unsecured loans we knew the lenders would seek other ways of clawing back their profit,’ he explained.

‘Unfortunately, although not unexpectedly, providers are hitting consumers in the pocket by increasing their margins across the board. The days of cheap loans now seem a distant memory, as banks appear to be less willing to compete in the unsecured loans market, and it is those borrowers who are looking to borrow small amounts who have to pay more,’ he said.

The best approach is to shop around and it may be cheaper to borrower slightly more money on a personal loan because of the difference in APRs. ‘Many providers are restricting their best deals to existing customers only, however even though loan rates are at their highest for some years there are still some competitive offers out there,’ added Moss.

He gives an example of Sainsbury’s Bank which charges 15.7% on a loan of £4,700 on which you would pay back £5,838 over three years. But borrowing an extra £300 would give you a rate of 8.8% and you would repay £5,679, a saving of £159.

‘If you’re looking for a smaller loan consider 0% interest free offers or low rate credit cards as a good alternative. Try not to borrow for longer than necessary or beyond the life of the product you are borrowing to purchase. For example if you are borrowing to buy a car and intend to change the car in three years time, consider taking out a loan of that length,’ said Moss.

He also points out that most loan providers no longer offer payment protection insurance with their products. If you want to protect your repayments you can still do this through specialist insurers