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“The International Monetary Fund has warned that falling house prices and slowing economic growth mean the credit crunch shows no signs of abating. Loan rates are already being increased and even withdrawn from the market altogether so it’s crucial consumers needing to borrow do not waste time…”
When mortgage rates began to fall a couple of weeks ago, optimists may have hoped that the storm of the credit crunch had finally blown over. However, in its latest global financial stability report, the International Monetary Fund warned that there is more bad weather to come.
According to its research, falling house prices and slowing economic growth are hitting credit and it reaffirmed predictions it made in April that banks and financial institutions could lose around £503bn as mortgage-backed assets lose their value.
Since the onset of the credit crunch we’ve seen lenders tighten their lending criteria, offering the best loan rates to only the ‘safest’ customers. There are two main reasons for this: Rising levels of bad debt means the banks are more choosy about who they will lend to and the liquidity crisis on the wholesale markets has resulted in institutions having less funding at their disposal which can be advanced to consumers in the way of mortgages and loans. Consequently, those who need to borrow are paying more for the privilege.
The price wars of a few years ago, when lenders were undercutting each other, are long gone and instead we have a market where many loan providers are looking to limit the amount of new business they take, rather than battling to take as much as they can. With this in mind, it’s likely that there will be more increases to come and it may not be long before the lowest loan rates available are between 8% and 9%.
Why you must act quickly
If you want to take advantage of the First Plus rate of 6.6% you literally only have days to get your application in. This is the cheapest homeowner loan rate in the UK and is available to borrowers aged 20-75 on minimum loans of £10,000 for a minimum term of 60 months. Secured loans are a good option for people with large debts – typically £25,000 or more - to whom personal loans are not available. However, do be aware that your repayments are secured against your property – failure to meet your repayments could lead to your home being repossessed.
When the First Plus rate disappears the options available to those needing a secured loan will become much more limited. Fair & Square offers a rate of 6.9% but then the rate leaps to 7.9% from Tesco Loans. By comparison, if you took out a £25,000 loan over 10 years at the First Plus rate of 6.6% you’d be making monthly payments of £282.71 for a total repayment of £33,925 compared to the Tesco Loans rate of 7.9% on which you’d be making payments of £296.25 a month and repaying £35,550 in total. The more loan rates rise, the larger the monthly repayments and the total repayable will be.
For smaller loan amounts – less than £25,000 - there are more options available with Moneyback Bank currently offering the leading rate at 7.6%. This is followed by Alliance & Leicester and Halifax both of which are offering rates of 7.7%.
However, these leading deals are only available to those with excellent credit scores. The rate you are offered will also depend on the amount you want to borrow. For example, A&L’s rate of 7.7% is only available for loans of £7,500 or more. If you are borrowing less than that the rate is 8.8%. Similarly, Halifax’s rate of 7.7% is available only for loans between £7,000 and £13,000.
What if you don’t have an excellent credit rating?
If your credit score is less than exemplary there are options available although you will have fewer products to choose from and will pay a higher rate of interest because lenders will deem you to be higher risk.
For borrowers with a ‘fair’ credit profile, Ocean Finance has the leading rate at 9.5%, while Central Capital offers a rate of 10.6%. However, these rates are unlikely to be around for much longer. Norton Finance has just increased its rates, with the cost of a loan for those with fair credit rating having gone up from 8.9% to 11.4% and other lenders are likely to follow suit, particularly if rates on deals for those with the best credit ratings continue to rise.
If you have poor credit, Norton Finance and Ocean Finance are again among the most competitive with both offering rates of 13.9%. The key is to use our Smart Search tool which returns rates based on an estimate of your credit score, providing deals that you’re likely to be accepted for. Remember that rejections further harm your credit score – so don’t apply for deals you have no chance of securing.
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