Flexible loans get personal

Flexibility - the in vogue feature among credit products right now - has hit the personal loan market with this week's launch of a deal by Abbey National's online bank cahoot that offers an alternative to traditional unsecured loans.

With the majority of unsecured personal loans, you are tied in to repaying the advance via a fixed monthly amount over a fixed term, typically one to five years. Pay off the loan early and you normally incur a redemption penalty of one or two months' interest.

Personal loan interest rates vary between lenders, but tend to be tiered so that the more you borrow, the lower the rate you pay. You can pay rates of up to 20% on smaller loans of £1,000-£3,000, typically dropping to 9%-11% on loans of £10,000 or more.

Until now, medium-term borrowers wanting a loan of, say, £5,000 to £10,000 have had little choice but to go for one of these highly structured personal loan packages. They have missed out while mortgage borrowers are offered flexibility and attractive low-rate revolving credit deals are available to short-term borrowers via credit cards.

But the cahoot flexible loan is geared for people with a variable income flow who may want to pay different amounts off each month and ultimately pay their loan off early, like a credit card but generally with higher credit limits available.

A credit limit of up to £13,000 is determined by your credit rating, your credit history and the amount you request. You may then borrow and pay back money whenever you want within the loan facility, which is ongoing with no fixed end date. The typical variable interest rate being quoted by cahoot is a competitive 8%.

"This makes it a very good alternative to standard unsecured personal loans," says Emma Rowlands-Rudd at financial data provider Moneyfacts. In fact, the flat interest rate offered to a loan customer will vary depending on how they rate on cahoot's credit scoring system. "There are four flat rates of interest - 7%, 8%, 9% and 11% - corresponding to four credit scores," the company explains.

"We aren't cherry picking. Our credit scoring system is commonly used by all financial services providers. It's neither particularly onerous nor particularly lax. A quarter of our customers will fall into each of the four rates," says the company.

But Barclays director of lending Chris Gillespie says the cahoot offer is not as good as it looks. "People need to look beyond the APR because if you step outside the rules there are hefty charges."

He also believes flexibility should only be on offer to a customer with a proven track record. Barclays has refused to advertise its own Select product, preferring to sign up existing customers. "You have to be pretty confident and disciplined because otherwise you can find yourself in difficulty," he says.

The Co-op Bank offers a variable option loan of £2,000-£10,000 to customers and non-customers which also has a revolving borrowing facility at a variable rate of 14.7%. Northern Rock, Alliance & Leicester and Intelligent Finance can also be considered rivals. First Direct's Flexiloan offers a similar facility, but only to existing cheque account customers.