Lock into a loan now before rates rise further - how to choose the right personal loan

The rise in the Bank of England base rate from 4.75% to 5%, its highest level since September 2001, is bad news for borrowers. Experts predict that there could be more pain on the way as rates are set to rise further in the New Year. Now could, therefore, be a good time to lock in to a lower rate for your unsecured personal loan, before lenders get round to hoisting their fixed rates - and more rises come through the pipeline.

This actually makes a lot of sense - particularly as Christmas is just around the corner.

So, if you think you might need a personal loan for your festive spending, shop around now for a good deal, which you can pay off in manageable installments over time. Resist the temptation to put all your spending on credit cards and find yourself left with the problem of how to pay it all off later - possibly at a higher rate.

Credit cards cause bad debt, they don't solve it!

According to a recent survey, credit cards are the biggest cause of bad debt in the UK. They feature in 91% of all serious cases. Store cards, which carry even higher interest rates, are present in 41% of cases. In fact, the Association of British Credit Unions (Abcul) has urged borrowers to opt for personal loans, rather than fuel their spending by taking out credit cards.

Abbie Shelton, an Abcul spokesperson, said that buying on credit was "a dangerous tool in the wrong hands" and that credit card repayments were a problem for many, as they are unstructured .

"A lot of people just pay back the minimum, and it is a decade before theyve repaid the loan," she said. In contrast, personal loans have a structured payment programme, stipulating how much to pay, how long repayments will go on for and when the loan will be repaid in full.

According to another report, this time by market analyst Datamonitor, lenders such as Abbey, Barclays and Egg are encouraging long-term credit card borrowers with high balances to consolidate their credit card debt into unsecured loans so they can manage debt better. The Post Office has developed an integrated credit card deal, which converts the balance built up on the card during an initial six-month interest-free period into a personal loan at a rate of 6.8%.

14 November 2006 © Moneyextra.com

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