Borrowers taking out personal loans urged to apply now as rates begin to rise

BORROWERS who are looking to take out a personal loan are being urged to apply now as rates are rising, experts warn.

The cost of taking out an unsecured loan is creeping upwards, despite the Bank of England base rate being at an all-time low.

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An unsecured loan is a sum of cash that's borrowed without having to offer up any assets as collateral.

It's the opposite to a loan such as a mortgage, which is secured against your property.

Many borrowers use them to consolidate debts that are spread across multiple products, such as credit cards and overdrafts, so it's easier and cheaper to manage by paying back one loan.

Figures from Moneyfacts.co.uk found that the average interest rate on a £5,000 personal loan over three years has risen by 0.3 per cent to 7.4 per cent since January when it was 7.1 per cent.

Help available for those in debt

IF you're struggling with debt, here are some options you might want to consider

And if you're unsure what the right option is for you, speak to a free debit advice organisation, such as Citizens Advice.

Debt management plan (DMP)

A DMP is an informal agreement so you can stop it at any time and resume the normal debt repayments, or adjust your payments if your circumstances change, like you lose your job.

It ends when you've paid off the debt so it could last for decades.

Many firms charge a fee for the service, either upfront or one that's incorporated into your monthly payments.

If you're struggling due to coronavirus, contact your DMP provider so it can liaise with lenders on your behalf.

Debt relief order

If you're struggling to meet your IPA or IPO repayments, these can be updated if your income changes. You must contact your trustee immediately if this happens.

Equally, if you get a lump sum while you’re paying an IPA or IPO, you may be asked to make a one-off payment from it.

A DRO is way to have your debts written off if you have under £20,000 of debt and no assets.

You have to pay a £90 fee but you don't have to make repayments and after 12 months your debts are written off.

You can't apply for a DRO if you're a homeowner. It will negatively affect your credit score for six years and it may be difficult to get credit during this time and details will be published publically.

Bankruptcy

Bankruptcy is a last resort if there is no other way to repay your debts. It usually lasts a year but it can be up to three years.

A bankruptcy practitioner called a trustee will take control of your assets and sell them to repay your debts.

If you can afford it, the trustee will ask you to make regular payments towards your debts from your income through an income payment agreement (IPA).

If you can’t agree on payment amounts for an IPA, the trustee can apply for an income payment order (IPO). If you don’t meet these payments, the trustee can then apply to extend your bankruptcy.

It is much more difficult to get credit after bankruptcy and your credit rating will be affected by up to six years.

You could lose your house, possessions and some professions won't let you work if you've been made bankrupt.

If you own a business it could be sold and the details of your bankruptcy will be published publically.

You have to pay a £680 fee to go bankrupt.

 

Typically, a £10,000 unsecured loan repaid over five years has increased to 4.5 per cent up from 4.4 per cent in May 2020.

And even though average interest rates on a £7,500 loan taken out over five years are lower than they were in January, they're still increasing compared to the month before.

Rates typically stood at 4.6 per cent in January and February before dropping to 4.4 per cent in May, and then rising again to 4.5 per cent this month.

One of the biggest jumps seen by the finance firm was on the Nectar loan offered by Sainsbury’s Bank, which went from 3.3 per cent APR, to 6.9 percent APR in six months for loans of between £5,000 and £7,499 taken out over a term of one to five years.

Some lenders, such as Besavvi, Admiral and Ikano Bank have even pulled their loans to new customers altogether since March 2020.

It's bad news for borrowers who should otherwise be reaping the benefits of a record low base rate, which is currently set at 0.1 per cent to help the economy through the coronavirus crisis.

It fell from 0.75 per cent in January and 0.25 per cent in March due to the pandemic.

The Bank of England's base rate is what lenders use to set their own ratesfor borrowers.

Rachel Springall, finance expert at Moneyfacts.co.uk said: "Lenders adjust their loan pricing in reaction to the changing market, so if they feel lending money out in the current environment is riskier, they can increase rates or pull out of the market entirely.

"This movement would echo what was seen in the aftermath of the financial crash."

Moneyfacts.co.uk has a loan comparison tool to help you find the best deal if you are looking for a loan.

And if you're unsure which unsecured loans you're most likely to be accepted for, you can use a tool such as MoneySavingExpert's loan eligibility calculator.

This lets you know the likelihood of you getting the top loans, but, unlike actually applying, protects your credit score.

Zero per cent credit cards are another way that you can consolidate your debt – here's our round up to the best deals out there.

If your household finances are struggling because of the coronavirus outbreak there are a number of ways you can get help to lower your outgoings, such as taking a payment holiday on your borrowing.

And here are 11 steps for getting out of debt if you are having a hard time.

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