Getting a cheap loan is becoming ever more difficult, as base rates continue to edge up.

Since at least one more rate rise is being forecast for the next few months, and maybe two, now could be a good time to lock into a fixed rate, if you think you might need to borrow over the summer for home improvements, a holiday or a new car.

While the super-cheap loans of just a few months ago now seem like a distant memory, there are still some good deals to be had – but do watch out for some sneaky tricks by the lenders.

One of the sneakiest is to hike the cost of payment protection insurance (PPI) – an insurance policy to cover loan repayments if you can’t work because of an accident, sickness or unemployment – to subsidise the cost of the loan. That way the so-called “APR” can stay low, but you can still end up paying more.

APR stands for Annual Percentage Rate. This is a measure which is meant to take account of the total cost of the loan. “Headline rates” that you see in promotional material may include introductory discounts, but leave arrangement fees or other charges out of the calculation. The APR – which must by law always be stated in any advertisement or promotional literature for a loan – takes into account not just the interest payable each month but also any other fees you have to pay. This makes it a better benchmark when you are trying to find the cheapest product. Generally, the lower the APR the better the deal.

However, the APR does not include the cost of loan insurance or fees for redeeming the loan early, if these apply. You need to factor these into your sums if they are going to affect you.

Unfortunately, when choosing a loan many people just look at the monthly payments to see if they can afford to borrow. This is a very poor way of judging if the loan offer is a good one, and means that many people could be losing badly.
 
According to research from Alliance & Leicester, a lack of understanding about how APRs work could be costing UK borrowers over a quarter of a billion pounds a year.

It says that, with typical interest rates from some of the largest UK retail banks exceeding 10% APR for personal loans, people who took out a loan within the last year will fork out over £285 million more in personal loan interest payments than they would if they had borrowed from A&L.

But A&L is not above some tricks of its own. As rates have generally gone up, A&L’s have – perhaps surprisingly to some – come down for those borrowing larger sums. But if you factor in the cost of loan insurance, the story is somewhat different.

Michelle Slade, personal finance analyst at Moneyfacts.co.uk, says: “Alliance & Leicester and Moneyback Bank [part of the A&L group] have both made changes to their loan offerings, including an increase to rates and PPI.”

For instance, she says A&L has increased its rate for loans below £5,000 by 1 per cent; but for loans over £10,000 it has raised the cost of PPI, increasing the monthly repayment on the £10,000 loan from £234.49 to £246.21. This adds a hefty £703.20 to the total amount owed over the term.

More dramatically, Moneyback Bank has increased the interest rate on its lower tiers by 1.3%, but has actually reduced the rates for loans of larger sums by as much as 0.3%. Meanwhile, it has craftily pushed up the cost of PPI, so that a loan where the interest rate seems to have fallen is actually more expensive than it was before the rate rise, when you take all the costs together, including insurance.

For instance, the rate for a £10,000 loan over five years has fallen from 6.2% to 6.1%, but the increased insurance premium takes the total monthly repayment up from £233.83 to £244.80, an increase of £10.97 a month. The total cost of PPI is now a staggering £3,095.40 over the five years.

Among the best buys quoted by Moneyfacts for a £10,000 loan over five years are Masterloan at 5.9% APR; Moneyback Bank at 6.1%; Northern Rock at 6.1%, and Royal Bank of Scotland, NatWest and Eskimo Loans, all at 6.9%. But that’s without insurance. There is no doubt that the rates on these deals are good – but you need to be careful what you are signing up to.

Michelle Slade says: “These latest changes illustrate just how important it is to compare the full cost rather than the rate alone when shopping for a loan. And remember, you don’t have to take the insurance on offer from the loan provider; other independent providers, such as paymentcare.co.uk and British Insurance, offer more competitively priced and more flexible policies.”

---

Tag this article :