Personal loan price war wages on as competition levels continue to rise in finance industry
Personal loan price war wages on as competition levels continue to rise in finance industry.
The new found levels of competition within the banking industry have begun to reflect on the products on offer as rates on personal loans have continued to tumble this summer.
Less mainstream providers such as Sainsburyís Bank and Cahoot have joined the price war, unveiling new personal loan offerings between £7,500 and £15,000 that come with hugely attractive rates of 4.3 and 4.2% respectively.
Both have maximum loan terms of 5 years, though borrowers from Sainsburyís can lower their headline rate to 4.2% if they opt to pay their loan back within 3 years. The cheap costs mean that someone borrowing £10,000 for 5 years from Cahoot would have to pay just £184.89 each month toward their debt, subject to attaining the headline rate, and a total repayment of £11,093.40, whilst the equivalent loan term and size from Sainsburyís would necessitate a monthly loan repayment of £185.15, providing the borrower attains the headline rate on offer.
HSBC have also cut the rates on their medium sized personal loans between £7,000 and £15,000 in value to a highly competitive 4.3% whilst their counterparts Tesco and Yorkshire banks have all released new personal loan offerings with interest rates lower than 4.5%.
HSBCís latest product is only available to customers who already have a current account with them, though those who also have a ëPremierí account are entitled to obtain the headline rate on borrowing up to £25,000.
Loan applicants can define their own loan term between 2-5 years, though it should be noted that the headline rate is only available to borrowers who possess a good credit rating, which could make it extremely hard to obtain a personal loan with a cheap rate if not ensured prior to the application date.
Since 2012, personal loan rates have fallen substantially; with Cahoot, Sainsburyís and HSBCís new deal the most recent in a series of cuts made to products within the banking sector.
The governmentís Funding for Lending Scheme and soaring competition levels in the finance market have been forwarded by financial specialists as the primary reasons behind the recent fall in personal loan rates, though a number of prospective loan holders have been advised to approach the new loans cautiously as lenders will be apprehensive to hand out the cheap headline rates to any customers who are unable to clearly display that they have a commendable past track record of borrowing and have a stable financial situation at present.
Competition levels on the rise
The recent decline on the rates attached to personal loans started to occur two years ago, in July 2012, when the government officially opened their Funding for Lending scheme for banks and building societies to use in order to encourage them to lend more money to individuals and bolster consumer spending power in the UK.
The scheme enabled the countryís largest finance lenders to acquire finance at borrowing costs as low as 0.25% on the premise that they then lent out to more loan applicants. The scheme also necessitated that banks and building societies passed on these cheap interest costs to borrowers in order to bolster their spending power but not place too high an immediate burden on their finances through high monthly repayments.
The overall effect of the initiative has been steady but noticeable and personal loan rates have fallen from their 2012 average of 7% to a significantly lower 5% at the beginning of 2014.
And despite Funding for Lending access being withdrawn from the personal loan sector and refocused toward bolstering to businesses, the legacy of the scheme has appeared to have remained on the personal finance market as rates have carried on their downward trajectory this year.
Finance experts have argued that rising demand levels for personal loans has contributed to the levels of competition within the industry raising which in turn has seen consumers treated to a series of gradually improving offerings as lenders battle it out to try and attract as many new people to their service as possible.
Other driving reasons for the rise in demand for personal loans have been a renewed desire across consumer circles to buy a car or have their home extended which has likely been incurred by the extended period of cheap borrowing costs that the UK has undergone since 2009, when the Bank of England first lowered the base rate to just 0.5%.
Factors such as the increased desire to purchase cars and embark on property extensions have been forwarded as some of the primary reasons behind why so many consumers have begun to seek the acquisition of a personal loans, with the low borrowing costs meaning that many feel comfortable enough to take on larger levels of debt and repay them in a affordable and spaced out manner.
Size your loan to suit your situation
Whilst personal loan rates continue to fall, finance specialists have advised prospective borrowers to carefully consider the size of the loan they wish to take out, because larger loans typically come with lower borrowing costs whilst smaller products are often more expensive but do not provide such a severe monthly financial burden.
The reason for this is that banks and building societies typically regard borrowers of smaller sized loans as more dangerous because the past has illustrated that borrowers of smaller loans tend to default more and produce a higher amount of bad debt.
The reality of this is reflected in the disparity between HSBCís larger and smaller personal loan products with their 4.3% rate, £7,000-£15,000 offer far cheap than the 21.9% attached to their 2 year, £2500 personal loan deal.
For smaller loans, it is advised that you look for Peer-Peer organisations like Zopa, which currently offer small loans up to £2,500 at a significantly smaller rate of 8%.
Personal loans to keep your eye on
Sainsburyís Bank- Currently offer personal loans between £7,500 and £15,000 at a rate of 4.3% and with optional loan terms between 1 and 5 years. The rate can be lowered to 4.2%, but the borrower must pay the loan back within three years, rather than 5. The low rate means that borrowing £10,000 for 5 years would necessitate monthly repayments of £185.15, providing the borrower attains the headline rate on offer.
HSBC- Currently provides personal loans between £7,500 and £15,000 at a rate of 4.3% and an optional loan term between 1 and 5 years. This means that borrowing £15,000 for 3 years would necessitate monthly repayments of £444.31 providing that acquisition of the headline rate is secured.
Tesco Bank- Currently has personal loans between £7,500 and £15,000 on offer at a rate of 4.5% and a term between 1 and 10 years.
Cahoot Personal Loan- Offers personal loans between £7,500 and £15,000 at a rate of 4.2% and a loan term up to five years. This means that borrowing £10,000 over 5 years would necessitate monthly repayments of £184.89, subject to attaining the headline rate, and total repayment of £11,093.40.
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