Credit crunch turns the screw on loan rates

Banks, building societies and financial services providers have hiked personal loan interest rates in the first three months of 2008 despite a Bank of England base rate cut, according to MoneyExpert.com.

Average rates on all unsecured personal loans are up from 10.62 per cent at the beginning of the year to 11.4 per cent now, the independent financial comparison website says.

And the cost of borrowing is on the increase no matter how much money you ask for, according to MoneyExpert.com. Rates on balances of £2,500 are up from 9.49 per cent in January to 10.11 per cent now, while the cost of a £5,000 loan is up from an average 9.76 per cent to 9.93 per cent.

The cost of lending on larger sums is also increasing –a £7,500 unsecured loan would have cost an average 8.3 per cent at the beginning of the year, but now typically costs around 9.21 per cent. And the average rate on a £10,000 unsecured loan was 8.88 per cent three months ago but now is 9.55 per cent.

The independent financial comparison website says lenders are fearful of high risk customers who may not be able to repay their loans and are tightening the screws on borrowers as a result.

Sean Gardner of MoneyExpert.com said: “Over 180,000 people consolidate their debts every month, and the vast majority turn to an unsecured personal loan to help them control their finances.

“However lenders are wary of customers’ ability to repay what they owe so are becoming increasingly strict when it comes to choosing who they lend money to.

“But this should not put you off if you are looking to borrow money. There are still competitive rates out there, particularly for people with good credit records. Those in muddier waters can still borrow but may have to pay more than they would have done even three months ago. The best way to ascertain how much you’ll pay is by comparing the market online.”

Over the first quarter of 2008 around 43 per cent of loan searches on MoneyExpert.com were made by people regarded as having “adverse credit records”. The independent website says there are no guarantees that people who represent a risk to lenders will get the rate they see online or in advertisements, and should not expect the cheapest deal.

Currently providers offering rates under 7.5 per cent APR on sums of £7,500 include Tesco Personal Loans, MoneyBack, Lombard Direct, Asda, Sainsbury’s Bank and Direct Line.