The not-so-cheap UK Personal Loans

By: MoneyFacts

Unsecured personal loans can be ideal for people who have debts to consolidate or who want to make a purchase with a fixed repayment plan. It’s not surprising, therefore, that in the current low interest rate environment this type of finance is proving to be popular with many borrowers.

However, these loans are not always the best option, and the latest research from Moneyfacts.co.uk reveals that anyone looking to take out a smaller loan may be shocked by how much they will be charged in interest compared to alternative forms of borrowing.

The lowest rate customers could currently achieve on a small personal loan of £3,000 is 5.9% (a deal offered in branch by Metro Bank). This loan would result in interest payments of £272.76 over three years. However, if they were to put £3,000 on the best 0% balance transfer card, which has an interest-free term of 40 months, borrowers would only incur a £75.90 fee (2.53%), saving £196.86 in the process. Alternatively, transferring money on the best money transfer card would incur a £118.20 fee (3.94%), which would still save borrowers £154.56 versus the loan.*

Rachel Springall, Finance Expert at Moneyfacts.co.uk, said:

“One of the draws of using a personal loan is its simple fixed repayment plan, which means borrowers know exactly how long the term is and how much they’ll pay each month. However, customers must be wary of borrowing smaller amounts of cash, as a small loan is unlikely to be as cost-effective as using a competitive interest-free credit card. In fact, borrowers could save almost £200 in interest repayments by borrowing via a best buy 0% interest balance transfer credit card.

“It’s also important to point out that borrowers are not necessarily guaranteed to get the best rates for a personal loan. Lenders only have to offer advertised rates to 51% of successful applicants, which means that even the best loan can end up being an expensive option for those who fall outside of this charmed circle.

“Competition has really intensified in the interest-free credit card market, which is why a balance transfer card can be a great alternative for short-term finance, provided borrowers pay off the debt before interest applies. Borrowers will also have greater flexibility with their repayments on a credit card compared with a loan, which could be helpful in the event of a financial emergency.

“Whichever method borrowers choose they must be sure that they can comfortably afford to repay the debt. Loans and credit card debts leave a financial footprint, so keeping up with repayments and reducing debt is imperative.”

*Metro Bank would charge 5.9% APR on a £3,000 loan over three years, which results in payments of £90.91 a month (£272.76 interest in total). The lowest and average loan rates do not include peer-to-peer loans.

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Moneyfacts.co.uk is the UK's leading independent provider of personal finance information. For the last 20 years, Moneyfacts' information has been the key driver behind many personal finance decisions, from the Treasury to the high street.

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