Loans which pay for Xmas


Christmas may be the season for giving, but it is also the time of year for borrowing to pay for it. More personal loans will be taken out over the next few weeks than at any other time of the year, largely to pay for spending on presents.

Last December, more than £5.7 billion was spent on overdrafts, credit cards and unsecured personal loans. And experts predict higher borrowing this year as people push out the boat for the millennium.

Fortunately, loan companies are cutting charges and making their terms for borrowers more flexible.

Many High Street firms offer loans over the phone and the internet, so borrowers are no longer tied to their banks or building societies. Credit cards have been the traditional choice for people who want flexible borrowing because the debt can be repaid in whole or in part at any time.

But cards are expensive, even with special deals. In the past, personal loans had the advantage of structured repayments and more competitive interest rates, but they have never been particularly flexible. Borrowers who sign up to repay the money over, say, three years, face big penalties if they clear the debt earlier.

Now all that is changing. The newer players, in particular, will allow borrowers to make extra payments or pay off the whole amount early without penalty, saving money on interest charges.

Prudential's Egg and Vivid, the new name for Yorkshire bank's Phone-A-Loan operation, let borrowers do this.

Egg, among others, will also allow customers to take repayment 'holidays' if money is tight, though the interest continues to roll up during this period.

The bad news for borrowers is that the price varies widely. Loans from High Street banks tend to be the most expensive while phone and internet alternatives are often the cheapest.

Martha Catterall of London financial planner City Independent says: 'This is yet another example of the big banks being uncompetitive and relying on customer apathy. It is a cliche to tell people to shop around, but it is worth it.'

It is tempting when trying to track down the cheapest loan simply to look at the APR - annual percentage rate.

But that can be misleading, according to Liz Chettleburgh of Moneyfacts magazine. She says: 'The APR can be calculated in different ways and can disguise hidden extras.

'The best way to compare loans is to ask how much the monthly payments will be as well as the total payments over the life of a loan.'

Some lenders such as Northern Rock offer a lower interest rate to customers who are willing to sign up for the lender's payment protection insurance. But these insurance policies are generally expensive. On a £3,000 loan, premiums can add more than £13 a month, for example, drastically increasing the cost of the loan.

Loans which pay for Xmas

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