Borrowers who want to take out a personal loan are not only being offered rock-bottom interest rates – but also the chance to borrow record amounts of up to £35,000.
Sainsbury’s Bank has become the first provider to offer new and existing customers a personal unsecured loan of £35,000. It comes with a typical interest rate of 6.9% for those borrowing over five years, or 6.8% for those borrowing between one and three years.
Personal loans are usually available for amounts up to £25,000, where the best rate is just under 5%.
Sainsbury’s said its decision to move into the “larger loans market” was because it wants to offer “greater choice and flexibility to those considering making a significant investment or purchase, such as home reconfigurations and renovations like an extension.”
The tightening of rules on mortgage lending may also be behind the move. These came in April this year and have meant it is harder for borrowers to get a home loan or to extend an existing one to pay for something like home improvements.
Typically, under the new rules triggered by the mortgage market review, mortgage holders now have to undergo a two hour interview from their lender in order to extend their borrowing.
“I think now that Sainsbury’s has made this move other providers will follow,” said Andrew Hagger, personal finance expert at Moneycomms.co.uk. “I am sure one reason the bank has done this is because people don’t want to go through a two- or three-hour interview just to extend their mortgage.”
However, Hagger sounded a note of caution for those thinking of borrowing this much, pointing out that rates on most mortgages are far below the 6.9% offered by Sainsbury’s.
“For those who would rather take a personal loan rather than adding to the mortgage with a further advance, the process and obtaining the funds will be quicker and less arduous, but it does come at a price,” he said. “It [the Sainsbury’s loan] works out quite a bit more expensive.”
Repayments on the Sainsbury’s loan work out at £691 a month over five years. Extending a mortgage would allow a borrower to increase the period of borrowing and therefore reduce the monthly repayments.
However, he added that it would also appeal to those who didn’t have the equity in their property to enable them to borrow an extra £35,000.
There are other lenders that lend this amount unsecured, but their deals come with restrictions. Barclays will lend as much as £35,000 to existing bank customers and the loan comes with a rate of 8.5%. Hitachi will also lend this much via moneysupermarket.com but at a rate of 11.9% and lending is restricted to those over 25 who earn £20,000 a year or more and the loan must be used for home improvements.
A price war in the personal loan market, particularly for loans around £7,500, has fuelled a recent surge in sales of unsecured personal loans to a level not seen since 2009, according to the August figures from the British Bankers’ Association.
“I was particularly struck that after years of decline demand for unsecured personal loans is rising quite strongly again,” said BBA statistics director David Dooks. “Those products are often used to finance bigger purchase such as cars or major home improvements – the sort of spending we often put off until we feel confident about our financial circumstances.”
