Cost of personal loans soars

Published on Monday 18 August 2008 21:14

PERSONAL loan rates have hit a seven-year high as lenders continue to hike the cost of deals in the face of the credit crunch, according to figures published yesterday.

According to a financial information group the best personal loan rate currently available for someone borrowing 5,000 over three years was 7.6 per cent.

Moneyfacts.co.uk said this was the highest best-buy rate since 2001, and well up on a leading rate of 6.3 per cent in August last year and a recent low of 5.6 per cent in August 2006.

Michelle Slade, analyst at the firm, said: "In the last few years the market for personal loans has been extremely competitive as lenders and borrowers cashed in on the availability of cheap credit.

"Increased competition pushed prices down and lenders continually undercut each other in order to top best-buy tables."

But she said since August 2006, the average rate available for people borrowing 5,000 over three years had increased by nearly 3 per cent from 8.1 per cent to around 11 per cent today.

Personal loan rates have been hit by the credit crunch as banks pass on their own higher borrowing costs to consumers.

Lenders have also raised their rates to reflect the riskier nature of unsecured debt, which consumers are more likely to default on than a mortgage if they run into financial difficulties.

Slade warned that with no real sign that conditions were going to get better in the loan market in the near future, rates could increase further.

She added: "This is extremely bad news for consumers who may be considering consolidating existing debts to try to drive down their monthly expenditure."