FinTech Startup Revolut is Now Offering Personal Loans, but here's when to Avoid
Virtual bank Revolut has been popular since its 2015 launch, for the ability to spend, withdraw cash or send money instantly in many currencies, exchanging from GBP, USD or EUR at the Spot Interbank exchange rate - without transaction fees.
The company has raised £3.2m of angel and venture capital money and recently launched a new version with credit capability (i.e., personal loans). Revolut markets its loans as being cheaper than you’d get from a bank. This may be true, but that doesn’t mean users should take out a Revolut loan.
The very nature of Revolut loans could be a problem for some consumers. Given the loans are pitched as “instant” and are on the small side (i.e., between £500 and £5,000), we can’t help but wonder if they’ll be used to fund unaffordable and spontaneous splurges (e.g., a weekend break) or pay off other debts, continuing a user’s debt cycle.
Taking out debt to cover expenses is generally a bad idea, unless you have an urgent need like a car repair. Ideally, consumers should make purchases that can be paid off by month end. Taking out a personal loan to cover unnecessary purchases will only encourage the build-up of debt and interest charges. This principle applies to both credit cards and personal loans.
How Revolut Loans Work
Revolut is not the actual lender, but an intermediary – the loans are provided by Lending Works’ Peer to Peer (P2P) lending platform. Revolut customers can apply for loans between £500 and £5,000, with an option to repay in 12 to 60 months (i.e., one to five years). Perks include no early repayment penalties and existing Revolut customers can get money into their account within minutes, if approved. The representative APR is 9%, which means that at least 51% of people will receive an APR of 9%; the rest will get a higher interest rate.
Are Revolut Loans a Good Option?
Even those who are genuinely short of funds and need a personal loan – perhaps to fund an emergency home repair - should consider options other than Revolut before making a decision. Yes, as Revolut advertises, you'll probably pay less interest on a Revolut loan than a high street bank personal loan. However, a high street bank is not the only alternative to Revolut. Other P2P lending sites may offer more competitive rates.
Depending on the loan size, you may even save by borrowing directly from Lending Works. When we checked, loans from Lending Works sized between £3,000 and £5,000 sported a 4.35% representative APR – less than half the rate you’d pay at Revolut. (The opposite held true for loans between £500 and £3,000, where you could source a lower representative APR at Revolut.) Keep in mind that rates change regularly and you may find a different situation. But it's good to check multiple sources before making a decision.
Representative APRs^:
| Personal Loans between | Revolut | Lending Works | Sample of High Street Banks |
|---|---|---|---|
| £1,000 - £3,000 | 9% | 13.1% | 26% |
£3,000 - £5,000 | 9% | 4.35% | 21% |
^Note: Rates from March 2017
These different interest rates translate into vastly different interest charges over the life of a loan. Take a 12-month, £4,000 loan. The following chart shows how much interest you'd pay in total over the loan period.
While Revolut representative APRs are lower-than-average relative to the personal loan market for loan sizes between £500 and £3,000, there are other, cheaper funding alternatives. Might they work for you? It depends on the size of your funding need and whether or not a credit card would be suitable. The credit card market is flush with 0% purchases and/or balance transfer cards, to cover both upcoming retail spending and existing credit card debt, respectively. The only hitch there is that initial credit limits are unlikely to be over £1,000 and may not be sufficient for your needs. The right solution for you will depend on your individual needs.
According to the Lending Works website, the majority of borrowers take out a personal loan for debt consolidation purposes. Transferring those balances to a balance transfer card with a 0% interest promotional period may result in lower interest charges, or it may not. A missed payment on a balance transfer card will bring your 0% intro period to a premature end, leaving you to pay your card’s standard interest rate of, probably, 18% or more on remaining balances.
Just because Revolut makes it easy to get a loan, doesn’t mean that consumers should take one. Loans are just another form of debt, which can be costly and should be avoided if possible. Consumers with a genuine need may be attracted by the ease of the process and, as a result, may not fully research cheaper alternatives. While this may be an attractive and profitable business model for investors, Revolut loans aren’t necessarily good for all consumers.