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Well-off benefit in personal loan price war

Increasing competition is driving growth in the personal loan market, but borrowers are being warned that they may not qualify for the low interest rates that are being advertised.

The top interest rates have fallen several percentage points in the past year and it is now possible to get a personal loan for just 4.5 per cent. The boom has been driven by growing consumer interest, with Jafar Hassan of uSwitch.com estimating there has been a 54 per cent rise in consumers seeking such loans over the last year.

Research by Hitachi Capital shows that its customers take out an average loan of £6,500 over a 45-month period. One in four use the loan to consolidate their debts, while 23 per cent use it for home improvement or to buy a car.

Lenders have begun a price war, and Mr Hassan expects to see lenders getting creative with their offerings. He says: “Where providers have struggled to match the best loan rates available, they have tried to innovate by rewarding loyal current account customers or offered flexible repayment options. One example of this is the Lloyds Flexible Loan, which offers preferential rates for customers who have held a Lloyds bank account for over five years.”

However, Charlotte Nelson of moneyfacts.co.uk,warns that lenders are not obliged to offer the cheap headline rates to more than 51 per cent of successful applicants, so the deal you are offered could vary significantly depending on your circumstances. “Each lender will have their own criteria which also takes into account an applicant’s credit history, which affects whether the borrower is accepted and the interest that they will be charged,” she says.

At the same time, secured loans are growing in popularity. The money you borrow is “secured” against an asset such as a house, a car or something of value. It is usually easier to get a secured loan even if you have a poor credit history, simply because you are proving collateral. You are also able to borrow more, depending on the value of your collateral. However, the interest rate you are offered will still depend on a number of factors, including your credit score, and tends to be higher than an unsecured loan. Ms Nelson also warns that the rate is “usually variable, so it’s difficult to budget as the rate you pay could go up and down”.

Other downsides include the risk of losing your collateral if you miss a payment, and inflexibility when it comes to overpayments or early settlements.

If you are looking to get a personal loan, Matt Sanders, from gocompare.com, says you should keep the following in mind:

– Some lenders will charge a penalty if you repay the loan early — usually equal to one or two months’ interest, depending on how much notice you give.

– Check the terms and conditions thoroughly for other fees, such as arrangement fees.

– Lenders may charge a fee for same-day transfers. With normal transfers, that usually take two to three working days, you can usually avoid this fee.

– Some lenders offer “payment holidays”. While these can be beneficial if finances are tight, bear in mind that interest will continue to be charged, meaning the total amount you repay will increase.

Case study: I use paintings as collateral

When Nataliya Dolenko needed a personal loan she went to Borro, which lets people provide assets such as cars and works of art as collateral.

The 36-year-old model retrained as a fashion designer, and being self-employed means that her income varies. She often has to wait several months before receiving payment for her work. It also makes it harder for her to get a loan from a high-street bank. Ms Dolenko says she values the flexibility that Borro gives her, and borrows between £2,000 and £3,000 each time.

“The first time I needed to raise money quickly was because I was getting divorced,” says the mother of two, who lives in Barnes, southwest London.

“I was able to get a loan against my jewellery, and I’ve since borrowed money [using watches and paintings as collateral] to renovate the house. You can get the money as quickly as the same day.”

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