The TSB will offer small, short-term loans as an alternative to overdrafts


The TSB says it plans to unveil a new range of short-term loans to help short-term borrowers avoid turning to payday loans. Will other lenders follow?

From April, banks will have to change the way they charge for arranged overdrafts, which will see borrowers face interest of up to 49.9% EAR.

While the majority will pay less or the same amount, an estimated three in 10 could pay more and the regulator has suggested those struggling should look to ‘alternative methods of credit’.

More borrowers are expected to turn to personal loans as a safe option. But at the moment, these products are not ideal for short-term borrowing.

Here, which one? explains what the TSB has planned, why the personal loan market needs to improve, and the cheapest small personal loans to get if you want to clear your overdraft.

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What does the TSB have planned for loans?

The TSB is considering offering smaller loans of up to one year as an alternative to overdrafts.

We asked the bank to elaborate, but it had no details about products it might offer that could help overdraft borrowers avoid payday loans or other high-cost credit.

A TSB spokesperson said: “Clients told us they wanted more help managing short-term cash flow problems and wanted a bank that offered better options when borrowing for periods of time. shorter.”

“We are currently in the process of developing short-term loan products to better meet the needs of our customers.”

The TSB, as part of an industry-wide change, will increase its overdraft rate to 39.9% EAR from April. Currently, the smallest loan offered by TSB is £1,000 which you can take out over two years at 27.9% APR.

The bank could make the rate more competitive on smaller loans and offer shorter terms of less than two years – and other banks could follow suit.

This could trigger some competition between lenders in small, short-term loans that generally reflect overdraft levels.

However, when we asked the major providers about upcoming changes to their loans, none had similar plans to share.

Why should banks innovate on small loans?

Personal loans are a good way to borrow if you need a large sum of money and generally they get cheaper the longer you borrow.

The sweet spot tends to be between £7,500 and £15,000, where rates are as low as 2.8% APR.

However, those looking to borrow small amounts that reflect typical overdraft limits of £1,000 pay significantly more.

Our analysis revealed that a small personal loan of £1,000 can cost up to 28.9% APR, and it could be higher if you don’t have a perfect credit history.

Also, if you want to pay off your loan each month longer than necessary, or if you want to pay it off in full with a lump sum before the end of the term, some lenders may charge you a penalty for this lien.

Who? last year’s analysis found 59% of market lenders charge prepayment fees on their personal loans.

  • Learn more:personal loans explained

How much can you borrow with a small loan now?

According to our research, you won’t be able to borrow less than £1,000 using a personal loan from a major bank.

The smallest amount you can borrow starts at £1,000 and the shortest period you can spread repayments over is one year.

Who? Analysis of the Moneyfacts data revealed 32 unsecured loans offered by 21 banks willing to lend £1,000 over a year.

Of these, 18 offers were available to new and existing customers and 14 were only open to existing customers.

Which providers offer small personal loans?

According to our research, you won’t be able to borrow less than £1000 from a major high street bank.

The smallest amount you can borrow starts at £1,000 and the shortest period you can spread repayments over is one year.

Who? Analysis of the Moneyfacts data revealed 32 unsecured loans offered by 21 banks willing to lend £1,000 over a year.

Of these, 18 offers were available to new and existing customers and 14 were only open to existing customers.

The cheapest short-term loans

You can see the rates for small personal loans to borrow £1,000 over a year in the table below ranked from cheapest to most expensive.

The cheapest small personal loan is offered by Allied Irish Bank (AIB) for 12.6% APR and is available to new and existing customers.

If you took out the AIB loan and repaid it on time, your total repayment would be £1,065.72. So the cost of borrowing £1,000 for one year at 12.6% APR would be £65.72.

The most expensive in this niche comes from Halifax, which offers an APR of 28.9%.

If you took out the Halifax loan, your total repayment would be £1,144.32, so the cost of borrowing would be £144.32 – £78.60 more than the cheapest offer.

That said from April, the Halifax Small Personal Loan will be cheaper than its overdraft which will increase to 39.9% EAR or 49.9% EAR depending on your account and credit profile.

  • Learn more:the best rates for loans of £5,000, £10,000 and £15,000

Should I take out a personal loan?

To get the best rates on a personal loan you will need to have a good credit history.

Lenders only have to offer their highest rate to 51% of those who apply, so they are able to offer 49% a worse offer if they wish.

If you get a personal loan, you also have to make fixed repayments, and missing one could go on your credit report and hurt your chances of getting future credit.

Personal loans also do not offer “revolving credit”.

This means that when you make repayments, your balance isn’t refreshed and you won’t be able to spend that money like you would with an overdraft or credit card.

What to do if you are struggling with a bank overdraft

If you have a large overdraft and are wondering what to do once the new rates take effect, check out our article on how to pay overdraft.

It may be a good idea to use your savings or consider a 0% money transfer credit card.

  • Learn more:how to get out of an overdraft before rates go up
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