Starling Bank – a provider that only operates through your mobile phone – has launched its first lending product by offering loans to its customers.
Applications are made solely through your banking app, and Starling has introduced a unique feature that allows you to select a purchase you’ve already made from your account, and retrospectively spread the cost with a loan.
You’ll only be able to apply for a Starling Bank loan if you’re a customer and have activated your overdraft – and you’ll be able to borrow whatever is left of your overdraft balance.
But with loan rates starting at 11%, how competitive is Starling’s borrowing offer? Here’s what you need to know.
How do Starling Bank’s loans work?
Starling’s loans and overdrafts are linked, meaning that the maximum loan you can get will be the equivalent of your remaining overdraft.
Say you’ve got a £1,500 overdraft limit, and have used up £500. The maximum loan you could apply for would be £1,000. Repaying your loan frees up your overdraft again.
Loans are available for one, two or three years, and there are no early repayment charges.
You can monitor your loan balance, forthcoming payments and amend your repayment date all within Starling’s app.
What impact will applying for a Starling Bank loan have on your credit report?
When you apply for a Starling Bank account, you’ll be subject to a ‘soft’ credit check. This means the bank will ask for some basic information, but it won’t count as credit application on your credit report.
However, in order to get a loan from Starling, you’ll need to first activate its overdraft facility. This will create a ‘hard’ credit search on your credit report, which lasts for two years, meaning other companies that search your report will see that you’ve made an application.
The good news is that applying for a loan will not create an additional hard credit search. Too many hard searches over a short period looks bad in the eyes of financial companies, as it suggests you’re struggling to successfully get credit.
What is the ‘spread the cost’ feature?
However, Starling Bank also allows you to select a purchase you’ve already made and spread the cost of it.
But before you think about borrowing to cover the cost of a coffee, there’s a minimum loan amount of £500 (and a maximum of £5,000).
In fact, the Starling Bank app will identify transactions in your statement which qualify for the ‘spread the cost’ feature, and then take you through the loan application process, provided you have the sufficient overdraft limit to cover it.
Are Starling Bank’s loans cheap?
The loan rate you get from Starling Bank is based on your personal circumstances, but rates start at 11% and go up to 14.5%.
On first glance, that isn’t hugely competitive. Which? research has found that the cheapest loan on the market, borrowing £5,000 over three years, is currently offered by Sainsbury’s Bank, at a headline rate of 3.2%.
However, for smaller loans, Starling may be more attractive. We took a snapshot look at the rates currently on offer through price comparison site Confused.com to see where Starling Bank sits. Our scenario involved borrowing £1,000 over 12 months.
Starling’s 11% to 14.5% APR came next, followed by 15% APR charged by Nationwide Building Society, 17.9% APR charged by the AA and 18.6% APR charged by M&S Bank.
It should be noted that all of these rates are representative examples, and the actual rate of interest you’d pay would be based on your personal circumstances.
Why not just use your overdraft?
Given that Starling’s loans and overdrafts are linked, you may be tempted to just borrow from the overdraft.
Starling Bank charges a simple interest rate on its overdraft of 15% EAR, which is more expensive than the 11% APR lowest loan rate.
Be careful here, though. When you take out a loan, you’ll be charged interest on the full amount you borrow. Borrowing £1,000 over 12 months at 11% APR would result in monthly repayments of £88 and £58 in interest.
However, you’re only charged interest on overdraft borrowing when you use it.
Assuming you use the overdraft for two weeks in a month, every month, and make £88 monthly repayments, you’d end up paying around £36 in interest, making the overdraft option cheaper.
Of course, that requires you to be disciplined enough to pay off your overdraft in equal installments every month.
Are there cheaper ways to borrow money?
If you’re looking to borrow a smaller amount of money, you may be better off applying for a 0% balance transfer or 0%-on-purchases credit card that allows interest-free money transfers.
This allows you to transfer money from your credit card into your bank account, and pay 0% interest for a set period. The longest 0% balance transfer deal is currently 36 months.
You will, however, pay a percentage fee to transfer the money – usually between 1% and 5%, depending on the credit card you have. Borrowing £1,000 via a money transfer with a 3% would cost £30.
You must ensure you repay the money before your 0% deal ends, or you’ll end up paying a much higher rate of interest, typically around 18% to 20%, but it can be far higher in some instances.