Conventional wisdom tells us that a low interest rate loan is better than the best credit card rate. Whilst this is normally the case, not all deals are the same so it is important to delve more deeply in order to identify possible exceptions. The cost of all sources of unsecured borrowing have risen since the financial crisis so both loans and credit cards are more expensive. This means that it is important to keep an open mind and be prepared to shop about in order to minimise debt repayments. The one constant is that borrowers are going to need an excellent credit rating in order to increase their chances of receiving approval.
Rising Cost of Low Interest Rate Loans
Despite the Bank of England setting base rates at just 0.5%, the median low fixed rate loan rate is currently 12.4%. Just 4 years earlier, it was possible to get an affordable loan at just 5.7%. The reality is that lenders are more concerned with protecting their balance sheets from bad debt than they are the plummeting base rates of central banks. Andrew Hagger of Moneynet.co.uk stated: “The risk of defaults is higher in the current economic climate, and with banks making such ultra thin margins, the rates offered a few years ago were not sustainable with any defaults soon wiping out the profit margin on the loan itself.”
Low Credit Card Rates Increase to Record High
Bad debt doesn’t only affect the cost of low interest loans, it affects low interest rate credit cards just as much (if not more). According to PwC (leading business consultants), the default rate currently stands at an historic high of 6%. The latest figures from Moneyfacts show that the typical rate is now 18.8% APR. Michelle Slade, of Moneyfacts, stated that: “A borrower with £5,000 debt on a card, who repaid the minimum each month, would now repay an additional £2,289 over the life of the debt than they would have in February.”
Low Rate Loans vs Low APR Credit Cards
The above analysis can be used to conclude that an affordable loan (12.4%) is on average cheaper than a low interest credit card deal (18.8%). However, this doesn’t tell the whole story. Alliance and Leicester currently offer the cheapest loans (8.9%) when borrowing £5,000. Provided that the borrower has good credit, performing a series of zero interest balance transfers (even after the transfer fee of 4%) is a far more affordable way to borrow money. This should only be considered by those who are able to show financial discipline and use the money saved to clear the outstanding balance.