What has caused the Personal loan rates increase? Read on with Personal loans Now to learn about some of the reasons for the personal loan rates increase, and how this has affected many borrowers.
- Personal loans before the interest-rate rise
- The effect on personal loans after the rise
- How much more borrowers will pay
- Credit card balance transfer deals
- The effect on existing borrowers
- Conclusions – personal loan rates increase
Personal Loans for Under 3%
Unsecured loans are what we refer to most of the time as personal loans. People are also aware of this term about funds borrowed that are not secured against some form of collateral to guarantee the loan. Low interest personal loans are typically used by borrowers to cover car costs. Additionally, it’s used by people to improve their homes by adding an extension or for consolidating their credit card debts. After the financial crisis, the interest rates offered on personal loans had fallen dramatically. However, only borrowers with excellent credit scores were able to enjoy them. This trend was changed at the end of 2016 for the first time by the introduction of Sainsbury’s Bank’s new personal loan that carried just 2.9% interest.
What Effect has the Bank of England’s Interest Rate Rise had on Personal Loans?
When the Bank of England raised its base rate of interest from 0.25% to 0.5% in November, the cheapest personal loans on the market was on offer at 2.8% – 2.9%. These were historically low-interest rates for unsecured borrowing and economists are predicting that these loans will disappear. A financial website called Moneyccomes recently analysed the personal loans market to see how the interest rate rise is affecting the cost of borrowing. They compared the four most significant lenders in the UK. Their research showed that they have upped their interest rates by an average of 0.35% on personal loans over the sum of £10,000. Here is what they found:
|Increasing interest rates of UK lenders|
|Personal Loan Lender||November 1||December 1||Increase|
|Clydesdale & Yorkshire||2.9%||3.6%||0.70%|
How Much More Will Those who Borrow a Loan End up Paying?
These increases on borrowing rates have only been seen on personal loans over £10.000 and have remained unchanged for personal loans under £3,000. This is because rates for lower loan amounts were already higher and have been able to absorb the base rate increase. The most dramatic changes have been made by Clydesdale & Yorkshire Bank who have increased their personal loan rates by just under 25% from 2.8% to 3.6%.
For those who borrowed £12,000 before the new increases over a three-year term, their total interest repayment is £534. This is compared to a borrower taking a personal loan after the changes, who will have to repay £666. Borrowers will now have to pay more to lend money at a time when many are finding it difficult to survive financially. This is due to rising inflation and years of pay caps. At the time of writing, there were only two lenders; Sainsbury’s Bank and John Lewis Finance who are still offering personal loans for under 3%.
So what have we learned so far?
- Personal loan borrowing rates dipped after the financial crisis, but they were only offering to those with good credit scores
- At the end of 2016 personal loan rates dropped below 3% for the first time.
- In November the Bank of England raised its base rate from 0.25% to 0.5%
- Experts predict that this rise will mean that personal loans under 3.0% will disappear.
- The four most significant lenders have upped their borrowing rates by an average of 0.35%
- Loans under £3,000 have remained unchanged as they were more expensive to buy
- Clydesdale & Yorkshire Bank have made the most significant personal loan rates increase in the price of a personal loan.
- Borrowers will now pay £132 more in interest for a £12,000 personal loan over three years
- Only two lenders are still offering personal loans under 3%
What has Happened to Credit Card Balance Transfer Deals?
Since November there have also been changes to the length of time that balance transfer credit cards offer interest-free periods. At the beginning of 2017, there were some lenders who offered up to 43 months of interest-free credit. However, these high figures have been reduced by many months.
|Interest free credit reduced by many months|
|0% Credit Card Lender||Longest Term||Now||Decrease|
|Halifax||43 Months||36 Months||7 months|
|MBNA||43 Months||37 Months||6 Months|
|Sainsbury’s Bank||42 Months||37 Months||5 Months|
|Barclaycard||42 Months||38 Months||4 Months|
|Nuba||42 Months||38 Months||4 Months|
The founder of Moneycommes, Andrew Haggar, said of their research that he expects personal loans under 3% to become a thing of the past and that the highest offer of 43 months on balance transfer credit cards may never be beaten.
Will these Increases Affect Existing Borrowers of Personal Loans In the UK?
For people who have existing personal loans the deal that they have made with their lender can be at a fixed-rate of interest or with a variable rate. Most borrowers choose to take out personal loans with a fixed rate of interest so that they will know exactly what they will pay back and for how long with an agreed rate of interest. Variable interest rate personal loans are less common, but some borrowers do choose to take them as the starting interest rate is usually slightly lower than that of fixed-rate personal loans.
The interest rate could stay the same throughout the loan term which means that borrowers are not affected by any interest rate changes, but if they rise then, their monthly repayment will rise too. Those people who chose to take personal loans with variable interest rates will now see a rise in their monthly repayments whereas those who took fixed rate personal loans will see no difference.
Conclusion – Personal Loan Rates Increase
This personal loan rates increase is no surprise after the Bank of England raised its base rate in November. The Bank has also recently warned of a credit bubble which has made lenders warier. The rises have not been seen for short term loans under £3,000 as interest rates for these lower amounts were already higher and lenders have been able to absorb the rise in the Bank’s rate. Those borrowers who already have fixed rate personal loans before the increases are safe as the loan terms have already been agreed on but those who chose a variable interest rate personal loan will see an increase in their repayments.