Personal Finance News

It was only a few months ago that the media was reporting that personal loans with a rate below 6% were becoming difficult to find. As the credit crunch continues to bare its teeth, rates have risen further and now it's impossible to find a deal below 7%.

Two years ago the most competitive interest rate you could get on a £10,000 personal loan was 5.6%. This time 12 months ago it had increased to 6.1%, and today the lowest rate you can get your hands on is 7.3%.

However it's important not to get too gloomy based on scary tabloid headlines telling us that interest rates on personal loans are rocketing. The truth of the matter is that even though rates have risen by around 1.7%, the actual increase in cost is only £7 per month, and that's on a £10,000 loan.

Whilst the credit crunch is partly to blame for this increased cost, we are probably also starting to see increases on the back of negative publicity and opposition to the excessive cost of payment protection insurance (PPI) often pushed on you when you apply for a personal loan.

A word of caution, although the headline grabbing personal loan rates may appear attractive, you may end up paying over the odds for your PPI as the lender may be subsidising its low and very tempting interest rates by stinging you with expensive insurance cover.

Payment protection Insurance is quite rightly a prickly subject, and in case you aren't already aware of some of the downfalls of this inflexible and overpriced product, let me enlighten you:

• Banks and Building Societies are very pushy when it comes to trying to sell you this insurance and it is purely because the product is extremely profitable for them and every policy they sell earns them a nice fat chunk of commission.
• The premiums are vastly overpriced and can be purchased for a fraction of the cost from a standalone provider such as British Insurance Limited.
• In most cases you are charged the whole premium in one lump sum (in some cases this can be a four figure sum). This will be added to your loan balance and the lender will then charge you interest on the premium for the full duration of the loan.
• If you repay your loan early, you will not receive a pro rata refund of your PPI premium, in fact if you cancel after say three years of a five year policy, the refund you receive will be virtually worthless.
• In many cases the PPI is sold to you even though you may be unable to claim on it. It is not suitable for many self employed workers and those on fixed term contracts.
• You will be unable to make a claim for an illness that you have suffered in the past (known as a pre-existing condition).

So how do I borrow an extra £1,000 for nothing?

If you look at the table below, you will see some examples of the monthly repayments and total costs for a personal loan of £5,000 repayable over 36 months, including lenders payment protection insurance (PPI).


If however, you were to take a personal loan from a lender without their payment protection insurance and then purchased your cover from a standalone provider you could borrow a lot more for the same monthly outlay.


Here's the proof of the pudding:


If you borrowed £6,000 (yes, £1,000 extra) over 36 months from Moneyback Bank and then applied via Moneynet for your PPI, this is how much it would cost:


Yes, that's right – you see if you plan your loan correctly you can actually put another £1,000 in your own pocket rather than paying it to the lender to subsidise their profits! I think I know which you would prefer.

Hopefully this has given you some food for thought, and if you have recently taken out a loan with PPI direct from your lender don't despair, it may still be worth cancelling your existing cover and switching to a cheaper option from a standalone provider. However, check the full cost implications with your lender and the new insurer before going down this route.

As with all insurance policies no matter where you buy them from, be sure to read the small print before you start shelling out for the premiums, its better that you find out now that the cover may not be suitable for you rather than when you come to claim and really need that insurance payout.