Cost of borrowing outstripping base rate

Lenders are increasing the cost of borrowing money by amounts that far outstrip the Bank of England’s base rate rises, according to new research from MoneyExpert.com.

The independent financial comparison website says that since November 2006 average loan rates have increased by more than the base rate across every single loan value threshold. The Bank of England base rate has risen from 5 per cent in November 2006 to 5.5 per cent now.

And MoneyExpert.com says this has affected people’s ability to repay their loans. New figures show that one in 50 adults – up to 926,000 people – have failed to make a payment on a personal loan in the six months to December 21st 2007 as their finances feel the strain of the rising cost of living.

People looking to borrow around £3,000 will be hardest hit, according to MoneyExpert.com. Its research shows that average rates on £3,000 loans have increased by a staggering 2.55 per cent from 12.35 per cent in November 2006 to 14.9 per cent now.

And even borrowers looking for larger loans – typically more attractive customers for lenders – haven’t escaped the price hikes. The interest rate on a typical £12,500 advance will cost 1.6 per cent more than it did just over a year ago, rising from an average 7.1 per cent to 8.78 per cent now.

Sean Gardner, Chief Executive of MoneyExpert.com, said: “With the cost of living on the increase the obvious thing to do for anyone feeling the strain is to borrow money to tide themselves over.

“But people who want to take out a loan to consolidate debts or to make a large purchase must be wary of the overall cost. A set of monthly payments may seem manageable but you always end up repaying much more than you borrow. The golden rule is only borrow what you are certain you can afford to repay.’”

MoneyExpert.com is warning that people classed as having poor credit records could suffer most – around 52 per cent of searches on the independent website in the last three months for loans of under £5,000 were by people regarded as having “adverse credit records”. The website says there are no guarantees that people who represent a risk to lenders will get the rate they see online or in advertisements.

The credit crunch has lead to lenders getting tougher on applications with rates rising and some firms such as LV=, GE Money and Leeds Building Society pulling out of the unsecured loans market entirely.

Sean Gardner added: “The unsecured loans market has always been extremely competitive, and there are still some good deals to be had. Paradoxically it is often the case that borrowing more will cost you comparatively less – but that’s not always true so people should research the market carefully.

“Also if you have a cloudy credit record then you need to be aware that the rates you see online or in advertisements aren’t necessarily the rate you will be offered when you apply for a loan. Frankly you could end up with a loan costing far more than what you had hoped – so don’t be caught unawares.”