Are flexible loans right for you - just how friendly are they?

Imagine a credit facility which is like a cross between an overdraft and a personal loan. In the absence of a fixed monthly payment, you can pay more back when you're feeling flush and less when times are tight. And when times are really tight you can simply re-borrow the money.

A flexible loan - or flexi-loan - lets you do this, but there are only five providers offering these loans at the moment and rates are rising.

Also known a revolving credit agreement, a flexi-loan works in a similar fashion to an overdraft in that you're given a credit limit up to which you can spend. Once a borrowing limit is agreed, consumers are free to draw additional amounts within this limit or make lump sum repayments without penalty.

The handy thing about a flexi-loan is that you can spend freely within your credit limit, make one-off or regular overpayments without penalty fees, and repay your entire debt without early settlement charges.

Furthermore, your interest bill is calculated daily and charged to your account each month, so flexi-loans also share some of the characteristics of credit cards. However, flexi-loans have no cash-withdrawal or arrangement fees, which set them apart from credit cards and overdrafts.

However, in the past month, two flexi-loan providers - HSBC and Cahoot - have increased their rates, and one - Marks & Spencer - has withdrawn from the market altogether, leaving only five providers in the sector.

Natwests flexi-loan is available to customers wanting to borrow more than £5,000 and has an APR of 10%. Borrowers can make lump sum or early repayments at any time without penalties and potentially have the option of a 12-month capital repayment holiday at the start of the loan. The loan has to be repaid within seven years, or ten year if it is for home improvements, and the minimum monthly payment is negotiable. Other providers set an amount you have to pay each month. With the Co-operative Bank, for example, you have to pay either 3% of the limit or £25, whichever is greater.

Cahoot recently put its rate up from 6.9% to 8.9% but it is still the cheapest flexi-loan on the market. Customers may borrow up to £20,000 and each month have to pay back either 2% of their credit limit or £50, whatever's more. As well as Natwest, Cahoot and the Co-op, Barclays and HSBC also offer flexi-loans.

When does a flexible loan make sense?

Flexi-loan APRs are similar to overdraft rates and slightly cheaper than credit cards. However they tend to be more expensive than mainstream personal loans although it is difficult to compare them as most providers' charging structure will depend on the amount borrowed and individual risk. But it is safe to say that customers looking for a long-term structured credit facility - rather than a flexible one - will be able to find better rates on personal loans. Moneyback Bank, for example, offers a personal loan at 5.6%.

So, what are the pros and cons of a flexible loan compared to other forms of borrowing?

Flexible loans are ideal if you only wish to borrow for a short period of time, and can be a handy reserve should any unexpected expenses arise, says Lisa Taylor of data analyst Moneyfacts, They can also be convenient for consumers whose pay is irregular, for example dependent on commission, as additional monthly or lump sum payments can be made at any time without penalty. Similarly the NatWest loan also allows for repayments to be made at varying frequencies from weekly to annually.

Also, for consumers who want to take advantage of flexible features, banks may be more likely to agree a flexible loan facility in preference to a larger overdraft due to the compulsory monthly repayments. You are likely to be granted a larger borrowing facility with a flexi-loan, as most lenders would not be keen to provide you with a permanent overdraft limit much in excess of your net monthly income.

The trouble with flexi-loans is that as the account provides revolving lending there is the danger that the loan will never be fully repaid, and as the required minimum payments can be relatively low it could take a considerable amount of time to repay, and considerable interest could be incurred in the meantime.

For example, the HSBC loan charges 15.9% interest and requires a minimum repayment of 4%. If you only paid the minimum each month it would equate to only £40 on a loan of £1,000. The interest charge would be £13.25, so only £26.75 of the capital would be repaid.

Essentially most borrowers should think carefully about taking out a flexi-loan. Although they can be a convenient form of borrowing, they are not suitable for everyone. Low rate personal loans or 0% credit card deals will be a better option in most cases.

28 July 2006 © Moneyextra.com

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