Best Loans Articles

Over the course of the past couple of years or so, since the start of the credit crunch and the banking crisis, it has become increasingly difficult for anyone to obtain a personal loan at anything like a competitive interest rate.

Even a person who may have a perfect credit history and high credit score may still struggle to get the personal loan they want at a reasonable rate. 

Despite the fact that the Bank of England Base rate of interest is at its lowest level ever in the history of the bank, the typical cost of a personal loan seems to be getting more expensive all the time and it may appear to some individuals that the days of being able to get a cheap loan may have gone forever.

As banks and other personal loan companies become ever more cautious about who they are prepared to lend money to, the average rate on a loan has steadily increased over the course of the past twelve months.

At the same time as interest rates on loans are increasing, the choice is actually becoming less, as several lenders have withdrawn from the loan market altogether. In fact, the number of different personal loan deals available on the market has actually decreased by more than a quarter over the course of the past twelve months alone.

One important factor which must be considered when applying for a new personal loan is that as the amount borrowed on a loan increases,  the average interest rate actually goes down, which means that it is quite possible that the more a person borrows, the less they will actually pay on the interest rate charged.

Although it might be expected that a larger loan would be more expensive than a small loan, due to the increased risk and exposure for the lender, it seems that the exact opposite is true.

New research from Moneyexpert.com has revealed that someone who applies for a personal loan of just £3,000 is likely to pay double the rate of a person who applies for a personal loan of more than £7,000. The research has found that the average interest rate on a persona loan for £3,000 currently stands at 19.3 per cent, whereas the average interest rate on a personal loan for a value between £7,000 and £10,000 is just 10.3 per cent.

A number of banks and other loan companies are now starting to offer competitive, cheap loan rates. However when the small print is looked at, the vast majority of these rates are only available for loans in excess of £7,500.

This, of course, could be beneficial for someone who is looking for a debt consolidation loan, for example. If an individual has a number of existing personal loans which were taken out with small balances, it is likely that they will be paying a high rate of interest on each of them. By bringing all of these loans together into one large debt consolidation loan, it is quite likely that the overall interest rate being charged will drop significantly and in this type of case, will probably save the borrower a large amount of money in interest payments over the full term of the loan, provided that the term is not extended by too long above the term of the original debts.

Whilst this is all well and good, there are a number of concerns beginning to arise amongst experts who deal with helping individuals manage and cope with their personal loans and other debts.

One of the big worries is that some people, who only require a small personal loan for a purchase, may be tempted to apply for a much larger loan than they actually need, simply in order to try and obtain a cheaper rate on the loan.

Of course, if someone is a borderline case on a rate drop, for example: someone needs a personal loan of around £7,000, but the interest rate charged goes down at £7,500, it could possibly be in the interests of the borrower to take out the larger loan in order to save interest.

The way of checking what is the best option in such a case is to look at the overall cost of the personal loan over the full term. The total cost of a loan is shown in the illustration and literature provided by the lender and this figure will show whether or not it is in the best interest of the borrower to apply for a larger loan in order to achieve a lower rate.

In a large number of cases however, it will not be in a borrower’s interest to apply for more money on a personal loan than they actually need, due to the fact that although the rate may be cheaper on a large loan, the borrower will be making monthly repayments and interest will be charged, on a much larger sum and as a result of this, the borrower is likely to have to repay far more than they would have done on a smaller loan with a higher interest rate.

Despite what should be a simple logical decision with regard to applying for a personal loan, many potential borrowers may not consider these factors and simply see a cheaper loan rate at a higher amount and therefore apply for more than they require, thereby increasing their debts and the amount they owe quite needlessly.

It would appear that the high street banks and other mainstream loan companies are not really greatly interested in offering small personal loans to individuals, a fact which is reflected in the level of interest rates they charge for such loans.

It is vitally important that someone thinking about taking out a new personal loan, for whatever reason, should not be tempted to borrow more than they need to simply to achieve a lower interest rate. This course of action is likely, in most cases, to end up costing them more.

With interest rates on loans continuing to increase and the choice of providers decreasing at the same time, it is more important than ever to shop around to get the best deal on a personal loan. There are now a large number of price comparison web sites which can be of great help for someone looking for a loan. Another alternative is to take professional advice from a Financial Adviser or Loan Broker, who will be able to give independent advice on the best type of loan to meet your needs, as well as the best provider to apply to for a personal loan and whether it is in a borrowers best interests to apply for a larger loan simply to obtain a cheaper interest rate.