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CASE STUDY

The backlash against payday lenders came to a head last week when the regulator promised to put a cap on their inflated charges.

But it is also perfectly possible to pay well over the odds for mainstream borrowing via credit card, loan or overdraft. However, there are some smart, lower-cost options.

Martin Wheatley, the Financial Conduct Authority's chief executive, said: "From January next year, if you borrow £100 for 30 days and pay back on time, you will not pay more than £24 in fees and charges and someone taking the same loan for 14 days will pay no more than £11.20. That's a significant saving."

There will also be a total cost cap of 100%, so borrowers will never have to repay more than twice the original loan.

But according to a Which? report earlier this year, that will make payday lenders cheaper than some banks, where an agreed overdraft of £100 for 30 days can cost £30 (Halifax) and unauthorised borrowing of £100 for 30 days can cost £100 (both Halifax and Santander).

The market is in the throes of its latest "price war" on personal loans, with banks, supermarket banks, and other providers all promoting headline rates at record lows.

The AA said it only charges 4.2% - but that rate is only available if you borrow at least £7500. At the Clydesdale, the headline rate is 5.7%, but to get that you need to borrow at least £15,000.

For loans of £5000 to £7500, Sainsbury's Bank has dropped its rate to 5.3% (repaid over three years).

Borrowing smaller amounts can cost a lot more. The cost of a £1500 overdraft for 12 months ranges from £153 at HSBC, charging a standard 19.9%, to £225 at Lloyds and Bank of Scotland, which also have a £6-a-month fee, and £365 at Halifax, according to calculations by Andrew Hagger at financial information website Moneycomms.

Hagger suggested that instead consumers could apply for the innovative MBNA Low Rate credit card which, for those with a sound credit rating, charges only 6.5%. Importantly, it allows transfers of cash direct into a current account with no fee, enabling people with an overdraft at a far higher rate to pay it off and be charged far less interest.

"It's also a much cheaper option than a personal loan if you're only looking to borrow a relatively small sum," Hagger said. "Even though there is a personal loan price war going on at the moment, the ultra-low headline rates of 4.3% APR are only on offer if you want to borrow £7500 or more, whereas the average rate if you want to borrow £2500 to £3000 is almost four times that at 16.4% APR, with many lenders charging more than 20% APR."

Royal Bank of Scotland recently became the first bank to opt out of the credit card price war, which has seen lenders ratcheting up the period they will allow 0% interest on balance transfers from barely 12 months at one time to 33 months now.

RBS said most people enticed to take out new cards by 0% balance transfers do not pay down the transferred debt when the free period ends, with two-thirds of them ending up on high interest rates with "payments which are potentially unaffordable".

That was backed up this week by social lender Zopa. Its research found that the average Briton has £4500 on their credit card, two-thirds of cardholders pay some interest each month, and 20% pay off only the minimum amount each month - which on £4500 at the average interest rate would mean repaying more than double the original debt and taking 17 years to do it.

That may serve as an amber light over the latest offer from Tesco Bank, which is offering a 32-month free interest period on transfers on its Clubcard credit card, with a transfer fee of 2.9 %, and three months interest-free on purchases. Then there is Bank of Scotland, which offers a 28-month interest amnesty and a fee of only 1.5% if transfers are made within 90 days, plus a tempting 12-month 0% period on purchases. Are such deals too tempting for some? Bank of Scotland says its card is "the best value for many customers' circumstances".

RBS said "a very high proportion" of all the debt held on UK credit cards is costing between 18% and 30%, so most borrowers would benefit from its Clear Platinum card with a rate of 6.9% being offered to 51% of customers (the rate then moves up to 9.9% or 14.9%).

Nationwide customers are being offered the choice of a 26-month interest-free balance transfer with a fee of 2.4%, or a 15-month transfer with a fee of only 0.65%. But the building society said: "These new options will particularly appeal to those intending on clearing their balances over a short time period."

Matt Sanders at GoCompare.com said Nationwide's move showed there were "great deals out there for savvy credit card users", also citing the Post Office's 18-month free transfer offer with a fee of 0.7%.

But he warned: "Debt is debt and it has to be paid off one way or another, or you'll incur interest. Work out what is the best for you; a lower fee and shorter period if you have a realistic plan in place, or if it's going to take some time to budget and pay it off, go for the longer interest-free period."

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