Personal Loans Increase But At What Cost?
Author: Michael Challiner

At one time, borrowing money from the bank would have involved
getting out the best suit and grovelling to the manager.

These days, banks ring customers at home and ask them if they
want to take out a loan. In fact, they almost give you hard
time if you're not borrowing.

Just as it's never been easier it's also never been quicker.
You can pick up the phone and arrange to borrow money as
quickly as you could book a table at a restaurant.

About two-thirds of the way up, somewhere between a credit card
and a mortgage, is the personal loan.

A credit card these days means being able to buy that must have
dress or CD before pay day, but more expensive single expenses,
such as buying a car, paying for a wedding or doing up a house,
it's the personal loan that has taken over.

While credit card borrowing fell by £300 million in mid 2006,
net lending on personal loans and overdrafts rose by almost
three times the amount seen in June, the latest statistics from
the British Bankers' Association (BBA) show.

New credit card borrowing reached a four-year low reaching £7
billion, while personal loans and overdrafts grew in
popularity, up to a net lending of £655 million.

Director of statistics at BBA, said that despite the decline in
mortgage lending, other means of borrowing of becoming more
popular and convenient.

"Unsecured lending is displaying quite a different trend, with
the growth rate continuing to decline, largely reflecting the
ongoing contraction in credit card borrowing," the director
said.

In April, Moneyfacts said that while credit card transfers can
offer cheaper rates than personal loans, people lacking
discipline with their repayments could benefit from the
structure a personal loan provides.

However, new research from uSwitch seems to indicate that the
less you borrow on a personal loan in the UK, the more likely
you are to be paying interest rates that are higher than the
lender's advertised Annual Percentage Rate (APR).

The major lenders all apply penalties when borrowers look to
repay early. Paying the loan early will automatically trigger a
charge of £175.

But the charges don't end there. Complicated small print
explains that borrowers are tied into the loan for eight years.


Loans can run for as long as 25 years given the amounts
involved. But if you want to repay your loan within three years
you will have to pay six months' worth of interest on the
outstanding amount.

Given that some customers are paying as much as three to four
times the going market rate for loans of higher amounts it is
estimated that more than half a million Brits who took out
banks loans of less than £5,000 in the last year are paying too
much.

There may now be a very valid and justified complainant that
they're being unfairly hit by this policy of applying different
interest rates depending on how much is being borrowed.

Nonetheless, UK loans do still remain one of the cheapest
possible ways for Brits to borrow large sums of money (over
£5,000) and so the costs of funding for small loans (under
£5,000) by UK banks should be viewed with caution.

Shop around for the cheapest personal loan possible is also the
advice of the head of personal finance at uSwitch, who notes
that interest rates do remain highly uncompetitive on small
loan amounts in the UK.

This would appear to be the case regardless of whether or not
the personal loan is secured or unsecured as UK lenders still
apply a tier based system to the interest rates they charge.

Alternative borrowing, such as a 0 per cent credit card, should
also now be included in any alternatives you are looking at if
you are considering taking out a small loan in the UK with a
very limited repayment period.

Alternatively, it may just be the times for Brits to start
thinking of borrowing larger sums of money just to help reduce
the cost of the borrowing.


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