In line with our risk management framework, today we published our Q4 2019 performance update.
Are personal loans better than secured loans?
The concept of lending and borrowing dates as far back as biblical times, although it was the early Italian pioneers who transformed this into the more fluid, quantifiable exchange we can associate with today whereby they would set up benches in busy marketplaces to provide a central point for people to borrow money. These benches were known as ‘bancas’, from which the word ‘bank’ is derived.
The problem with such transactions was that there was no central authority to regulate them, and interest rates were heavily varied - and borrowers were thus subject to exploitation. That’s not to say the illusion of a perfect system has been reached in the centuries since, and the recent financial crisis was (and still is) a traumatic reminder of the risks involved with any credit model.
The decline of interest rates
Nevertheless, today the climate for borrowing money in the UK has become quite favourable for those with decent credit ratings, which is largely to do with the fact that interest rates across the board have plummeted since 2008. Natural economic factors and a lack of consumer confidence as a consequence of the downturn were the root causes of this decline. However, as banks and building societies pulled up the drawbridge in terms of lending to consumers, HM Treasury launched its Funding for Lending Scheme (FLS) in July 2012 (it was removed in 2014) offering them billions of pounds in loans at rates as low as 0.25 per cent. The condition of this was that they then lent this money out.
The FLS thus applied significant downward pressure on the rates of both secured and unsecured loans in this country. Fixed-rate mortgages on average tumbled by 1 per cent over an 18-month period, while personal loans – previously available at best rates of around 7.5 per cent – are now attainable at interest rates of less than 5 per cent in some cases.
The continued downwards pressure on personal loan interest rates have been assisted by increased competition and the growth of online platforms, which have changed the dynamics of a market previously dominated by the high-street behemoths. The result of this is that in certain cases, rates on personal loans have even dipped below corresponding rates on secured loans.
This, in many ways, defies logic. Secured loans are asset-backed (usually against the borrower’s property), thus significantly reducing the risk of loss to the lender. For an unsecured lender, there is no such security against the loan so, to compensate for taking additional risk, the economic assumption is that they must charge a higher rate of interest. But clearly, this isn’t always the case.
What are the cheapest amounts to borrow?
An important thing to note is that any examples of cheaper rates on personal loans are likely to be for amounts between £7,500 and £15,000, as there tends to be more competition within the market for loans of that size.
Interestingly, smaller personal loans often result in higher rates. This is partly due to the fact that the majority of defaults and bad debts arise from those who borrow smaller amounts of money. However, the more significant factor is that for larger lenders, who have high per-loan administrative and underwriting costs, smaller loans are not worth their while, and they thus generally look to deter consumers from borrowing at these levels.
This of course creates a niche for smaller, more-nimble online peer-to-peer lenders like ourselves who have lower overheads and are thus able to fill the void.
So are unsecured loans the more preferable option?
It’s a broad question with no straightforward answer, but the virtues of personal loans for borrowers are plain for all to see. Aside from not being obliged to secure the loan against your home, application processes, particularly with agile online platforms such as ours, tend to be convenient and expedient. Additionally, a select group of unsecured lenders, including ourselves, will not charge for overpayments and early settlements. Given that most financial services firms (and all secured lenders) have interest charges of up to 55 days extra for paying loans off early, this presents a key potential saving for a loan seeker.
However, there is an important limitation on unsecured loans in that you can only borrow an amount ranging from £1,000 to £25,000, so for those looking to borrow more, a secured loan is likely to be the better option. Furthermore, those with credit ratings slightly below prime might be more likely to be approved for a secured loan (and at a better rate) given that the risk to the lender should be lower. And of course, despite recent trends, APRs on secured loans will usually still be lower too.
All in all, it is a personal choice which comes down to individual circumstances. What is important is to have a clear understanding of the pros and cons with each, and then discuss the terms with the lender so that you end up with a loan arrangement that works best for you.
Get email updates for future blogs:
Our website offers information about saving, investing, tax and other financial matters, but not personal advice. If you're not sure whether peer-to-peer lending is right for you, please seek independent financial advice, and if you decide to invest with Lending Works, please read our Key Lender Information PDF first.
Since opening our doors back in 2014, we’ve always prided ourselves on living and breathing two key principles at Lending Works: innovation, and putting the customer first in everything we do.
With the retail sector enduring its fair share of challenges, companies are looking at new ways to attract customers, and drive conversion. In an overcrowded, dog-eat-dog marketplace, with behemoths such as Amazon flexing their muscle, it’s easier said than done.
On 4 June 2019, the Financial Conduct Authority (FCA) released its new regulatory framework for peer-to-peer lending (P2P); a Policy Statement known as PS19/14. As you might imagine, it's a document which, following a three-month consultation, is a hefty read of no fewer than 102 pages.
In a difficult climate, customer acquisition and lead generation present stern challenges for UK retailers, and a great deal of marketing spend invariably gets directed towards getting feet through the door.
Over the last decade, there can be little dispute that the reputation of mainstream banks – and particularly the so-called ‘Big Four’ (HSBC, Barclays, Lloyds and RBS) – is at its lowest ebb.
The peer-to-peer (P2P) lending industry is now regulated by the Financial Conduct Authority (FCA). The regulatory framework has been designed to protect customers and promote effective competition.
Most people consider income tax to be a given, but in the UK it is barely two centuries old. In this article, we look at how this tax has developed over the years, and also why it is set to remain at the core of our tax system for many decades to come.
Open banking celebrated its second birthday last month, but has the ‘revolution for financial services’ that was promised actually come to pass? In this article, we look at the progress the initiative has made so far, and what the future holds in the face of high levels of scepticism.
On the face of it, a 'broken' energy market needed fixing, and the price caps introduced in early 2019 were heralded as the solution. But, one year later, have they actually helped consumers save?
Last week, the Office for National Statistics surprised economists by announcing that the Consumer Price Index (CPI) had sunk to 1.3 per cent for December – a full 20 basis points lower than City expectations, and also the November equivalent.
January tends to be a comedown following the Christmas festivities, and, from a personal finance perspective, a time for many Britons to lick their wounds. In particular, for those who’ve over-extended their credit card, it may feel like the walls have started to close in.