Best buy loan rates have increased by 1.3%

Consumers taking out best buy unsecured personal loans could expect to pay £1.2 billion more in interest than they would have if they took the loan out just over a year ago, according to research from uSwitch.com.

In the past 13 months alone, these ‘table topping loan deals' have risen from just 6.1% APR to 7.4% APR for £8,000 over four years. With the Bank of England base rate dropping from 5.75% APR to just 5.00% APR over the past year, unsecured personal loans buck the trend and have continuously risen.

Reports indicate that rejection rates are on the increase. It is estimated that 1.39 million people have had loan applications rejected since the beginning of the credit crunch. This provides further evidence that the ‘credit crunch' is actually more of a ‘credit clamp down' as nervous lenders hold onto their cash. Consumers that successfully secured a loan in July 2007 will end up paying £285.60 less in interest on a best buy deal of 6.1% APR compared to today's best buy at 7.6% APR.

Rates rocket

Best buy rates have soared in the past two and a half years, increasing by 1.9% APR from just 5.5% APR in January 2006 to 7.4% APR today for £8,000 over four years. Across the industry, seven providers have increased their rates so far this month. On a £10,000 loan over five years, this has pushed up the average APR from 8.74% APR to 9.04% APR (0.3% APR) over the past four weeks. Unsecured personal loans can be anything up to 37.9% APR for £1,000 over one year.

Sub-7% RIP

The death of sub-7% loans happened in the last three months with the six remaining providers in this segment hiking up rates by as much as 1% APR (Barclaycard 6.8% APR to 7.8% APR and Black Horse 6.9% APR to 7.9% APR).

Consumers must shop around - a £10,000 over five years at 9.04% APR (average loan rate) would cost £437 more in interest than a best buy loan at 7.4% APR.

Hardest hit tiers

Those borrowing lower amounts have been hit the hardest. One of the highest increases in interest rates over the past 13 months has been on £1,000 over one year, increasing by 3.44% APR from an average of 16.55% APR to 19.99% APR. In contrast, loans for £20,000 over five years have increased by 1.36% APR, less than half this amount. This is now one of the cheapest loan size and term available at an average of just 8.65% APR.

More bad news

Thirteen months ago, more than three quarters (78%) of unsecured personal loans carried an APR of less than 8% for £10,000 over five years - today this has dropped by 52% to just 26%. In the last month alone, this figure has tumbled from 40%.

Online vs. offline deals

Historically cheap online deals have also increased considerably over the past 13 months. For £10,000 over five years, these loans have increased from just 7.4% APR on average to 8.75% APR, up 1.35% APR. Offline deals are still more expensive and have seen greater hikes to an average of 9.48% APR from 7.7% last July, 1.78% APR higher. Just nine months ago, these loans were on average 1% APR cheaper than their offline counterparts, however this gap is now closing with the average online deal just 0.73% APR lower than the average offline loan.

Simeon Linstead, head of personal finance expert at uSwitch.com, the online price comparison and switching service, comments: "The loans market is extremely volatile at the moment and best buy deals have become more expensive over the past 13 months. However, the market is vast and there are still competitive rates for those who take the time to compare the offers available. Online loan deals are typically lower than their offline counterparts and in times of volatility in the credit markets and banking world, borrowing on a fixed rate loan can offer borrowers the peace of mind that, both, their interest rate and monthly payments are fixed for the term of the loan.

"It has always been the case that consumers borrowing small amounts of money tend to get stung with high APRs. Over the past 13 months, rates on these tiers have seen the biggest hikes. Overall, we wouldn't encourage consumers to take out a loan for a small amount such as £1000. There are other forms of credit available such as the 0% Virgin credit card which will allow consumers to borrow £1,000 at 0% APR for a full 15 months."