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Your Money > Loans Articles > Beware the loan...
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By Sarah Modlock
Loans used to be simple. You would borrow the money and pay it back. Now there is so much to watch out for. Typical rates, online rates, payment protection insurance, early repayment penalties, hidden fees...the list is endless. Now, just as many people are contemplating their finances before the festive season, news emerges that loan rates are soaring and the way they are priced is more confusing than ever. In fact 32 providers have increased personal loan rates in the three months following the base rate increase last July, with branch and telephone (offline) rates increasing by five times more, on average, than online only rates according to price comparison and switching service uSwitch.com. Meanwhile, more of the UK's high street banks continue to hide behind 'personal pricing' for offline applicants. This does not advertise typical APRs, and offers the perfect smoke screen to operate a less than transparent pricing policy. Following the Bank of England's base rate increase of 0.25% in July (to 5.75%), offline personal loan rates have increased by an average of 1% APR - four times the base rate rise. Over the same period online loan rates have increased by just 0.2% APR, just a fifth of the increase to offline offers. Online difference It's easy to see how buying online can make a big difference. Overall, 32 providers have increased loan rates in the last three months by an average of almost 1% and by as much as 3%.. Across all providers, the average APR for an online loan is currently 7.7%, compared to 8.7% for the average offline loan, costing consumers £267 in interest on a £10,000 loan. As well as comparing both online and offline rates, borrowers need to approach providers that operate 'personal pricing' with caution. uSwitch.com's research has found that seven banks have now adopted a personal pricing policy on offline loans. As rates aren't advertised, this means that customers going into a branch cannot expect to see "typical" APR's advertised and borrowers are given a 'personal' rate. This prevents customers from making a fair comparison and more worryingly it makes this area difficult to regulate. "There are already huge variations in the loan rates available to consumers amongst both online and offline deals, throwing the personal pricing smoke screen into the melting pot is just causing further confusion, making it a complete minefield for consumers to shop around and get the best deal," says Mike Naylor of uSwitch. "It is far from transparent and a perfect way for the big banks to prey on loyal customers that trust their existing bank to provide them with a competitive deal. In effect, there is absolutely no way of the industry knowing which rates customers are getting from each provider, which could harm competition," he adds. The UK's five 'big banks' account for 40% of the personal loan market. Seven providers; Abbey National, Bank of Scotland, Barclays, Clydesdale Bank, Halifax, HSBC and Yorkshire Bank have turned to offering personal pricing in-branch in the last 18 months. The problem is that personal pricing leaves customers with absolutely no way of knowing what rate they will be offered until they approach the bank. At the moment, Royal Bank of Scotland (RBS) and Natwest are the only high street banks not to have yet resorted to personal pricing. Vast market The availability of the sub 6% loan is now just a distant memory. However, the market is vast and there are still competitive rates for those who take the time to compare the offers available. Online loan deals are typically lower than their offline counterparts and in times of volatility in the credit markets and banking world, borrowing on a fixed rate loan can offer borrowers the peace of mind that, both, their interest rate and monthly payments are fixed for the term of the loan. "We urge consumers to be cautious if their bank offers them 'personal pricing' as there is no evidence to show that this is in the consumers' interest," says Mike Naylor. "At best, consumers should still compare the rate offered to them via this process to those in the wider market to ensure that it is the best deal for them." Another comparison site, Moneyfacts, also has an eye on the rising costs of loans. "The last nine months has seen a steady increase in the rates available for unsecured personal loans, only four months ago sub six percent rates were available, whereas today you would be hard pushed to get your hands on a rate of less than 6.9%," says Moneyfacts' Lisa Taylor. "If you are looking for a personal loan, make sure you take some time to shop around for the best deal. Choose the wrong loan and you could be paying more than twice the amount you need to in interest. The difference between the cheapest and most expensive loan will cost you £14.15 per month, or more than £500 over the three year term of the loan," she explains. Additional costs and best buys Based on an example of £5K over 36 months, the examples below show in pounds and pence the difference some of these latest increases will have on the borrowers:
Best buy personal loans available:
Source: uSwitch.com 15 October 2007 *loan rates exclusive to uSwich.com and other price comparison sites. Useful links:
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