Personal loan rates rise – should you use a credit card instead?

Whether a new year goal is to clear debts or to make home improvements, many consumers will be looking to take out a personal loan this January to fund their 2021 goal. But research carried out by Moneyfactscompare.co.uk has found that the average rate on borrowing a small sum of £3,000 has increased year-on-year, so this may not be the best option for consumers looking for the most cost-efficient way to borrow money.

The research has found that the average personal loan rate on sums of £3,000 has increased from 14.6% a year ago to 15.4% today. Saying this, consumers looking to borrow through a personal loan should compare deals on our personal loan chart as there are deals offering much lower rates when borrowing £3,000 over a three-year period.

A personal loan is often a good option for those looking to consolidate multiple debts, or who want to use the money to repay debts and have extra money left over, for example to carry out home improvements. As well as this, personal loans have the benefit of having a fixed repayment plan in place, as Rachel Springall, finance expert at Moneyfactscompare.co.uk, explains: “Unsecured personal loans are an ideal choice for consumers who want to know exactly how long they have before their debt is repaid as they provide a simple fixed repayment plan. Loan rates have risen year-on-year on small sums, so consumers looking for a loan may wish to compare deals carefully.”

For those looking to borrow £3,000 over a three-year period, the lowest rate available in the personal loan chart today is 7.9% being offered by Metro Bank. This deal would cost the borrower a total of £365.64 in interest and would have fixed monthly repayments of £93.49 for the three-year period.

Although there are some benefits to using a personal loan, borrowers may find it cheaper to borrow using a 0% purchase credit card or a 0% balance credit card instead.

A 0% purchase credit card is normally a good option for those looking to make purchases, for example if needing to pay for materials or furniture to carry out home improvements. These credit cards cannot be used to transfer or consolidate debts, unless they are a dual 0% purchase and balance transfer card, so borrowers need to ensure that the card they choose is the right one for their needs.

For those considering a 0% purchase credit card, the longest interest-free deal in the chart today, which does not charge a monthly fee and has no opening restrictions, is TSB’s Platinum Purchase Card Mastercard. This card is interest-free on purchases for 20 months, after which it charges 19.9% APR. If a credit limit of £3,000 was successfully applied for on this card, to repay the full £3,000 balance within 20 months would cost £150 in monthly repayments. Although this is a higher monthly repayment than the personal loan example above, the debt will be cleared 16 months quicker and there will be no interest charged on the debt.

An alternative for borrowers looking to consolidate debts rather than make purchases, is to choose a 0% balance transfer credit card. A balance transfer credit card will enable borrowers to transfer credit card debt, but not other outstanding debts such as personal loans or overdrafts, and as such borrowers need to consider if this is the right option for their debt consolidation or if a personal loan would be better suited to their needs.

The longest interest-free term currently available on a 0% balance transfer credit card is Sainsbury’s Bank’s Balance Transfer Credit Card Mastercard, which is interest-free for 29 months. This credit card charges a 3% transfer fee, which if £3,000 was being transferred, would add an extra £90 onto the debt. To repay the debt, including the extra £90, within the 29 months interest-free period, monthly repayments of £106.56 would need to be made. Although this is £13.07 more in monthly repayments than the personal loan example, the debt would be repaid seven months quicker and the overall cost of the debt would be £275.64 cheaper.

Clearly, consumers looking to borrow a small amount this January should consider all the options available and look at our personal loan, 0% purchase credit cards, and 0% balance credit card charts to see the best and cheapest deals available before making a decision.

As well as this, borrowers should be aware that whether they are accepted for the loan or credit card, the rate they are offered depends on their credit score. Springall added: “Before consumers apply for a loan or credit card, it would be wise to run off a credit report, to ensure they are in the best possible position to be granted one of the top deals. However, even so, consumers must keep in mind that lenders only have to offer advertised rates to 51% of successful applicants. There are some decent deals to take advantage of right now, but in light of the pandemic there is no guarantee these will not worsen in the months to come should lenders’ appetite to risk change.”