Flexible personal loans: is it worth paying extra?


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Both Halifax and Lloyds Bank launched 'flexible personal loans last week, but are the extra features worth the extra cost?

The first few weeks of 2014 have seen lenders engage in a personal loans price war.

Best buy rates have fallen to just 4.5% on loans between £7,500 and £15,000 repaid over three years with Sainsbury's Bank. But not all lenders are competing on price; some are trying to entice borrowers with flexible features instead.

Halifax's Clarity Loan

Halifax's Clarity Loan offers borrowers the ability to make additional payments and repay their loan early at any time without incurring any additional charges. The bank claims it's "one of the first major high street banks that allows customers to pay off their loan early for free."

The loan's headline rate is 5.9% for amounts between £7,000 and £15,000 repaid between one and seven years.

If you borrowed £7,500 over five years you'd pay £144.27 a month. That equates to £8,656.20 in total, including an interest bill of £1,156.20.

Borrowers making overpayments can both save on the total interest they pay and pay off the loan quicker.

It's worth pointing out that the Halifax Clarity Loan isn't available to everyone – you'll need to have a current account, mortgage, savings, credit card or loan with Halifax to be eligible.

Lloyds' Flexible Loan

Lloyds' Flexible Loan offers similar features to Halifax's Clarity Loan. Customers who take out the Flexible Loan will be able to make as many additional payments as they like and repay their loan at any time without any additional interest charges.

The headline rate for the Flexible Loan is 7.4%, so 1.5% higher than Halifax's offering. However if you've held a current account with Lloyds for more than five years it will knock 1% off this rate, bringing it down to 6.4%.

Flexible Loans are available for amounts between £7,500 and £25,000 over one to five years and you'll need to have held a Lloyds current account for at least three months to qualify.

Customers borrowing £7,500 over five years at 6.4% would pay £145.92 a month, making a total of £8,755.20 including a total interest bill of £1,255.20.

How do rates compare?

Elsewhere in the personal loans market, rates have dropped to an all-time low as lenders compete for business.

Sainsbury's Bank this week reduced the headline rate on its personal loans between £7,500 and £15,000 to just 4.5% on repayment terms of one to three years. Terms of four to five years have an advertised rate of 4.6%.

A £7,500 loan repaid over five years at 4.6% would cost £139.84 a month, equating to a total of £8,390.40 including a total interest bill of £890.40.

This means you'd save £364.80 in interest payments than if you took the Lloyds loan. Compared to the Halifax loan you'd save £265.80.

However, like Lloyds and Halifax, Sainsbury's Bank is only offering its best rates to loyal customers: you'll need to have a Nectar card and have used it either in-store or online at Sainsbury's in the past six months.

Elsewhere M&S Bank, Clydesdale Bank, Yorkshire Bank, Zopa, Tesco Bank and AA all have deals for between 4.7 and 4.9%.

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Charges for settling loans early

Most personal loans, including Sainsbury's latest offering, are subject to a settlement fee if you want to repay the loan early.

Under the Consumer Credit (Early Settlement) Regulations 2004 lenders can charge up to 58 days' interest on the amount remaining if you wish to pay off the loan in full before the end of your agreed term.

This means some borrowers could end up paying charges that outweigh the money they would have saved in interest by paying off the loan early, particularly if they are repaying a large sum.

In addition, if you make an overpayment totalling more than £8,000 in any given 12-month period, providers can also charge up to 1% of the amount you have overpaid.

Is it worth paying extra for flexible features?

Whether it's worth paying a higher interest rate for the flexible features offered by Lloyds or Halifax comes down to the likelihood of whether you'll use them.

If you think it's likely you'll want to make overpayments or pay off the whole loan early then it might be worth the extra cost. However, if you don't expect to have any more spare cash then normal during the loan's term, you'll be better off just going for the lowest rate you can get.

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