Baby Ace: Lend-to-save provider Zopa offers new record low personal loan rate of 4.4 per cent

By

Emma Gunn

Lend-to-save provider Zopa has undercut the banks to offer a new record low interest rate of 4.4 per cent on its borrowing.

Its new-and-improved offer has catapulted the alternative finance platform to the top of the mid-size loans table, beating the next best deal by 0.1 per cent. The cherry on top is that households can pay back what they owe at any time – without having to foot the bill for a hefty early repayment fee.

But, even though Zopa has become the first provider to break the 4.5 per cent barrier, is it worth turning your back on the banks for a cheaper rate?

Home improvements: Borrowers can now take out a loan at an all-time low rate of 4.4 per cent from Zopa

Personal loans have been getting cheaper in recent months thanks to a flurry of rate cuts.

Although lenders have not been slicing their prices dramatically, the constant game of one-upmanship with cuts of just 0.1 per cent have slowly driven down the cost of loans to an all time low.

If this downward trend continues, Zopa’s new rate, which has broken the 4.5 per cent barrier, could start another flurry of competition.

What will it cost you?

Zopa is advertising a rate of 4.4 per cent, down from 4.5 per cent, on three to five-year loans between £7,500 and £15,000.

It does not offer one-year loans, and its two-year loan has a higher rate of 6.2 per cent.

Over a three year period, borrowing £7,500 through the lend-to-save provider would cost a total of £8,010, with monthly repayments of £223 a month.

Customers do

pay a fixed fee of up to £190, depending on the size and term

of their loan, but this cost is reflected in the APR quoted

and charged.

The real benefit of lend-to-save, also known as peer-to-peer, loans is that there are no early repayment fees if you can clear the loan early or make over-payments.

If you are able to repay the money before the end of the term, most banks will charge up to 58 days’ interest on the remaining amount – meaning in some cases it is not actually worthwhile clearing it early.

WHAT IS LEND-TO-SAVE?

Lend-to-save, otherwise known as peer-to-peer, sites work as money matchmakers – pairing savers searching for higher interest rates with borrowers

looking for a cheap way to borrow.

Cutting out the middleman, ie the banks, usually means savers get a better rate while borrowers pay a marginally lower rate.

The main concern

for consumers considering lend-to-save has previously been that the industry was unregulated, which meant there was no official system in place to govern these kinds of platforms.

However, industry regulation has now been unveiled by the FCA, meaning that peer-to-peer loans are protected should the platform collapse.

The small print

Lend-to-save providers tend to have a stricter criteria on who they

will lend to, so as to avoid unnecessary defaults.

This means fewer applicants are likely to be accepted by Zopa than by a High Street bank.

For example, Zopa says it will not accept applications from anybody who is unemployed or under the age of 20. You must also have a good track record of repaying debt, and decent credit history.

Even if you are accepted, as with any loan, only 51 per cent of applicants are legally bound to be offered the headline rate – so you might end up with a deal charging higher interest.

That said, one of the major draws of the loan is

that it offers a soft search before you apply.

This means that you can

find out if you are likely to be accepted, and the rate you will be offered without leaving a mark on your credit rating.

If you don’t have a strong credit history, you may be offered a higher interest rate, but the rate offered will not change if you go on to take out the loan.

Are there any risks?

Although lend-to-save is still an alternative form of finance, new industry regulation by the FCA means that customers are protected should something go wrong.

This mostly affects savers, but it is worth noting that if the platform folds, a third party would step in to manage the company’s loans and borrowers would continue to repay as normal.

The terms of your borrowing would not change as they are fixed between the lender and the borrower rather than the platform itself – meaning the third party could not suddenly hike your interest.

The

new regulation

also means that borrowers have a 14 day cooling off period to change

their mind after they take out a loan and all lend-to-save providers

have to provide clear information on the risks of

defaulting and how this would affect them.

You can find out about what will happen if you cannot repay your Zopa loan here.

CHEAPEST RATES ON £7,500+ LOANS

So is it worth signing up?

Zopa’s new best-buy offering undercuts the

previous table-topping rate of 4.5 per cent by 0.1 per cent – a saving of £11 on a £7,500 loan.

It also beats its main peer-to-peer

competitor, RateSetter, by an impressive 2.3 per cent. This saves £16.77 each month on a £7,500 loan lasting three years.

The flexibility of Zopa’s loans is another aspect that makes it stand out.

Both Halifax and Lloyds Bank have recently launched flexible loans, offering no early-repayment charges if you pay off the balance before the end of your agreed term – but they come with existing customer restrictions and much higher interest.

The Halifax Clarity loan charges 5.9 per cent on medium-sized loans, but it is only open to existing Halifax customers with either a current account (excluding

Easycash), mortgage, savings, credit card or loan. This is £178.20 more expensive than a Zopa loan for £7,500 over three years.

The Lloyds Bank Flexible Loan will cost 7.4 per cent for existing customers, but those who have held a current account for five years or more will be offered a preferential rate of 6.4 per cent. This is £347 more expensive than a Zopa loan for £7,500 over three years.

Read more about these flexible loans here.

Zopa, however, does not offer the best price for

borrowing over a shorter term.

It does not offer

one-year loans and it’s two-year deals are also charged at a much higher 6.2 per cent. So it would probably be worth taking out a three year deal to lock down the 4.4 per cent rate, and paying back early.

Those looking to borrow over one or two years could also opt for a loan charging 4.5 per cent from either Sainsbury’s Bank and Santander (see below).

Santander’s mid-sized loan is open to everybody but to take out a Sainsbury’s Bank loan you will need to have a Nectar Card. Plus, it only offers its best rate to borrowers looking to repay during the first one to three years.

Top tip: Savvy borrowers could bag themselves an even cheaper rate using the Sainsbury’s Bank Price Promise (see below).

The next best deals are offered by Derbyshire, Clydesdale Bank and Yorkshire Bank at 4.6 per cent.

On a £10,000 loan this would cost you an extra £21, and £1 extra each month than the leading offer.

DO YOU HAVE A NECTAR CARD – YOU COULD PAY JUST 4.3 PER CENT

Sainsbury’s Bank advertises a rate of 4.5 per cent on its Standard Loan, lasting between one and three years. Anything above that costs 4.7 per cent.

But the loan’s small print – the Price Promise – means you can bag yourself an even cheaper rate then Zopa is currently offering because it offers to undercut any like-for-like loan by 0.1 per cent.

Usually there are strict criteria on what qualifies as a like-for-like loan. But although most people would not consider a peer-to-peer lender as a similar product, Sainsbury’s Bank has confirmed to This is Money that lend-to-save loans are included in the offer.

This is great news for Nectar Card holders willing to put in a bit

of extra leg work, because they could end up seriously cutting the cost of interest.

To get the 4.3 per cent rate you would have to provide a written offer

from the Zopa in the same name as the loan offered by

Sainsbury’s within 28 days of your borrowing being approved.

This unfortunately means that you have to actually apply for the Zopa loan first before using it to bag a cheaper rate with Sainsbury’s Bank. You won’t be able to use any confirmation from Zopa of the rate you will be offered produced by the pre-application soft search.

You also must not have accepted the standard loan offer by signing and returning the Sainsbury’s Loan agreement.

The loans must be compared on a like-for-like basis, based on features such as, but not limited to, length of loan,

fixed loan amount and repayment structure (including interest and set up

fees – if any).

If

you are not a Nectar card holder, you cannot apply for the deal.

However this is easily remedied by signing up for a free Nectar Card.

The offer may be higher

depending on your personal circumstances, credit assessment procedures

and other related factors.

Remember that every time you apply for credit it makes a mark on your credit file. Locking down the Price Promise would mean you are essentially applying for two loans.