Rise in personal loans due to debt consolidation

The main reason for taking out a personal loan this year, according to Sainsbury’s Bank, will be debt consolidation. Approximately one in three loans taken out this year will be for this reason, the bank reports.

This will see customers in Britain moving £11.9 billion of debt from expensive credit cards to either cheaper personal loans or secured loans.

However care should be taken by consumers when trying to save money on debt repayments as the small print can often lead to being ripped off.

As with most credit, it is wise to shop around to find the most competitive rate, especially where personal loans and credit cards are concerned. Even the slightest difference in rates can have a huge bearing on what you pay back in total. For example, a loan of £10,000 at a rate of eight per cent over five years could mean paying £2,180 in excess interest. So even a small difference of half a per cent could mean saving a few hundred pounds of the lifetime of the loan.
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Some lenders such as Northern Rock and Barclaycard Loans offer loans from as little as 5.7 per cent. Obviously interest rates depend on such criteria as the loan amount and the loan period but with so many lenders vying for your custom, you should be able to find a loan to suit your circumstances and your pocket.

According to Sainsbury’s, car purchases were the next popular reason for taking out a personal loan, followed by home improvements. Approximately 1.24 million loans will be taken out to buy cars. Combined, loans taken out for debt consolidation and car purchases will be worth £9.92 billion, Sainsbury’s estimates.

The nation’s increased demand for secured loans meant applications rose by 1.2 per cent last month, according to HSBC. However, the bank added that despite last months rise, levels are still lower than last year.

During the last three months, secured loans have supported the overall demand figures, according to HSBC, with mortgage demand up 14 per cent on the last three months of 2004.

By comparison, personal loan demand has fallen 2.9 per cent compared with the last three months of 2004.

As mortgage activity continues to support the overall index, it appears that the housing market may not yet have bottomed out. Consumer appetite for debt, however, appears to have stabilised at lower levels for now.

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