loan-sense.co.uk

Speculation has increased that best-buy loan rates could hit double figures before the end of the year if a crackdown on payment protection insurance (PPI) goes ahead as planned.

Currently the best rates for unsecured personal loans start at just under 6%, but rates have been rising in recent weeks following the Bank of England’s three bank rate rises since August (see our related story here).

Financial data specialists Moneyfacts warned that a clampdown on lenders selling PPI with their loans products could see rates rise to at least 10%.

Margins on personal loans are notoriously low and lenders struggle to make a profit on the main product. Instead, they make their money on the lucrative insurance policies they sell along with the loans.

Moneyfacts personal finance analyst Michelle Slade said: “With the Office of Fair Trading due to review PPI later this year, if lenders are forced to lower the cost of their PPI cover and revert to a ‘pay as you go’ type policy rather than a single premium, we could potentially see best buy loan interest rates reaching double figures before the end of 2007.”

Many of the best loan deals have disappeared since the beginning of the year. Northern Rock, for example, has increased its rate from 5.8% to 6.5%.

Slade added: “Our research shows that on a loan of £5,000 over three years, only four providers now offer rates below 6%, with more than 40% of the market charging in excess of 8%, and 16% charge over 10%.

With a difference of 14.8% APR between the most and least competitive rates, shopping around for the best deal is an absolute must.”

It makes sense to act now if you are thinking about taking out a loan and grab a good deal whilst lenders are still offering low rate loans. A great starting point is to get The Loan Helper to search the market for you to find the best deal available. With a panel of 16 top UK lenders on hand and hundreds of different loan deals available between them, The Loan Helper is ideally placed to secure the best possible rate for your loan now before lenders are forced to increase them. The Loan Helper offers a free personalised secured loan quotation service with no obligation, so request yours now here.

Unsecured borrowing fell during the last six months of 2006, a new study reports.

Figures released by Alliance & Leicester claim that Since July 2006, homeowners with mortgages have actually reduced their unsecured borrowings by an average of £197 (3%). By contrast households without mortgages to pay have continued to take out loans and use their credit cards – although at a much slower pace than in the past – on average increasing their unsecured debt by £98.

In addition, the appetite for personal loans and credit card debt has diminished. Credit card borrowing grew at its slowest rate on record (4%) last year, below the level of inflation and unsecured personal borrowing grew at its slowest rate since 1994.

Alliance & Leicester believe that base rates would need to reach 8.5% before people experience the same level of financial strain as they did in 1990, when on average homeowners spent almost a third of their income (30.1%) on interest payments on their borrowings. Currently interest payments represent just under a sixth of household income (16.5%), up from the low of 14.1% three years ago.

Spokesperson Chris Rhodes said: “We have entered 2007 with a reduced appetite for borrowing and house buying since last summer. Our latest survey suggests that another base rate rise could cool the housing market further.”

The study also reported that consumers have witnessed an increase in their income, while interest rates on credit cards and loans have fallen.

Mr Rhodes adds: “Consumers have shown an unprecedented appetite to reduce their unsecured borrowing, while their incomes have continued to grow and interest costs on their unsecured borrowings have fallen. This will have taken some of the sting out of the latest increase in base rates.”

It is fair to say that as rate increases continue, unsecured borrowing will become more difficult to manage for some borrowers, and for those with home equity available, a switch from unsecured to secured borrowing becomes a viable mechanism to maintain affordability.

Mr Rhodes continue: “With the average mortgage borrower having well over £100,000 of equity in their homes, many of those who remortgaged will have taken the opportunity to pay down some of their unsecured borrowings – this may partly explain the decline we have seen in their personal borrowing and credit card balances.”

Here at loan-sense we tend to agree with Mr Rhodes on this point, although there can be many cases where borrowers may have a fixed or capped mortgage in place at a rate that’s better than anything available in the market, or they may have experienced some adverse credit since taking out their current mortgage, again barring them from re-mortgaging at a rate as competetive as their existing deal. In these circumstances, a remortgage to refinance unsecured debt is less attractive and would probably constitute bad advice, however the opportunity still exists for borrowers in these circumstances to utilise their home equity to reduce the cost of their unsecured borrowing by converting it to a loan secured by a 2nd charge on their home.

The first step to reducing your outgoings by this method is to request a free no-obligation quote from The Loan Helper. The Loan Helper has access to hundreds of deals from a panel of 16 top lenders and will be able to find you the very best deal for your own individual circumstances.

Further to yesterday’s article on Typical APRs, today’s related article covers another oft-used tool in loan advertisments, the ‘from’ rate.

With lenders being a little restricted in the keen-ness of typical rate advertised due to the 67% qualification rule, the obvious solution is to tell potential applicants what their best rate is, hence the frequently seen phrase ‘rates from 5.9% APR’ etc, and when you see such a statement on an advertisement it seems pretty straightforward and obvious what that means - ‘this is our lowest rate’, although most savvy consumers will realise that this rate is probably reserved for applicants who represent the lowest risk.

Bizarrely however, the regulations on credit advertising dictate that a ‘from’ rate must be no lower than that which at least 10% of applicants responding to the advert will be offered.

What this means is that a lender may have a true lowest APR of e.g. 5.4%, but if less than 10% of applicants qualify to be offered this rate then the lender cannot legally state it in their advertising, being forced instead to quote a higher rate - one which at least 10% of applicants will be offered, as their ‘from APR’ - e.g. 5.9%.

This is a rule which surely frustrates any credit advertiser in such a competetive market where the top differentiator with which advertisers compete for the consumer’s attention is rate. To have a market leading rate, but be prevented from advertising it is a complete anathema to lenders, leading to a dilemma where a choice must be made; does the advertiser
a) bite the bullet and advertise a ‘from’ rate that is higher than it’s true lowest rate, but is the lowest rate that 10% of applicants qualify for.
b) ensure a 10% catchment of this rate, either by using a bottom rate slightly higher than it could be, or by keeping it super-low but extending it to slightly more risky applicants in order to reach the 10% threshold.
c) just advertise the lowest rate available irrespective of the 10% qualification rule.

in scenario a) the advertiser complies with the regulations, but is competetivley disadvantaging itself by doing so.
in scenario b) the advertiser is again compliant but must either disadvantage iteslf competetively or increase it’s risk at the low-rate end of the market, and increase which must be compensated for elsewhere at the expense of higher risk borrowers paying even higher rates.
in scenario c) the advertiser chooses to neither relinquish the competetive edge of the lowest rate nor to increase risk by offering the lowest rate to applicants who do not strictly qualify for it, instead deciding to flout the regulations and risk the consequences.

This is of course just food for thought, and there’s no suggestion that any credit advertiser is currently considering or undertaking any such thought process or advertising strategy, but considering the possibilities above to manipulate the credit advertising regulations you might wonder to yourself whenever you see a ‘from’ rate quoted in a credit advertisement, ‘what is this advertiser really saying to me?’

a) this is the lowest rate available and more than 10% of applicants qualify for it so we can state it in our ads.
b) there is a lower rate available, but since less than 10% of applicants qualify we cannot tell you about it.
c) this is the lowest rate available, and despite less than 10% of applicants qualifying for it we’re not going to give up our competetive edge by keeping quiet about it despite what the regulations say.

I’m sure you have seen it time and again - Typical APR. But how is ‘typical’ defined? What does this somewhat ambiguous but prevalent phrase really mean? Why do all the lenders have it on their advertising?

Well, to answer this effectively we should step back in time a little…

Before the banks became technologically sophistacted, most loan applicants would either be given the same interest rate or be simply declined as too great a risk to take on at the rate in force. However, technological advances led to the development of individual rating for risk, where the interest rate offered is based on the individual credit score of the applicant. This development became very popular with the lenders because it allowed them to have their cake and to eat it too by quoting their best rates as ‘typical’ in their promotional & marketing materials, yet only the lowest risk applicants qualified for it; meanwhile, applicants who represented a higher risk were fobbed off with much higher rates which not only offest the risk but generated much higher profits to the lenders.

After observing these dubious practices, the government took steps to prevent lenders from taking this mismatch as far as they would have otherwise liked to. The regulations now require that any advertisment for a loan must include a typical APR, and that this rate must be no lower than that which at least 67% of the resulting applications would qualify to receive.

So that is what ‘Typical APR’ means!

Tomorrow, we’ll cover the regulations concerning ‘from APRs’ - these are far from what most people think they are…