Endowment policy cash could be better option than high-interest loans

Publication date | 05/02/2010

Households which have, over the years, taken on a number of personal loans may now find the climbing interest repayments place an increased strain on their finances.

A new study by Moneyfacts.co.uk has revealed that the interest rates on personal loans stand at a nine-year high, but for some Britons, borrowing money may be the only way to cover certain expenses, even if this means taking on a high annual percentage rate (APR).

Chris Radford, chief executive officer at aap, the UK's biggest buyer of endowment policies, said some of its customers had decided to sell their underperforming endowment policies in order to raise the cash to help clear their personal loan balances, allowing their income to stretch further.

Expensive loans may mean Britons find money elsewhere

The survey by Moneyfacts.co.uk found that loan rates last peaked in 2001, when the bank base rate stood at its highest point over the last ten years, at six per cent.

Despite it dropping to the historic low of 0.5 per cent, personal loan rates are at a nine-year high.

A £5,000 loan from Alliance & Leicester came with an APR of 8.9 per cent last month. The same loan from the lender came with a 5.9 per cent APR attached in January 2005.

In January 2009, a loan for the same amount from Yourpersonalloan.co.uk had a 7.8 per cent APR. They appear to have risen quickly during the economic downturn.

Commenting on the findings, Michelle Slade, spokesperson for Moneyfacts.com, said: "Unemployment remains high and when people are struggling to meet repayments, unsecured lending is one of the first debts they stop repaying.

"The majority of lenders advertise typical rates, so borrowers shouldn't be surprised if they have to pay a higher personal loan rate than that shown."

Selling endowment policies could help cover expenses, rather than a loan

Mr Radford, from aap, said rather than take out a loan, some of its customers had decided to sell their unwanted endowment policies in order to cover the cost of a large expenditure.

He added that should aap make an offer to purchase an endowment policy, it will always pay more than the surrender value offered by the insurance company.

Reasons to sell your endowment policy