Are banks trying to kill the small personal loans market?

Borrowers looking for a personal loan of less than £5,000 need to be prepared for a shock as loan rates have rocketed by as much as 130 per cent compared to 2006, according to analysis by moneysupermarket.com. This is despite Bank of England base rate falling 4 per cent over the same period.

Although loan rates have risen across the board since 2006, it is loans for smaller amounts that have rocketed. Four years ago the top 10 average rates for loans of £3,000 was 6.49 per cent APR which equated to £309 interest over three years; today's average is currently 14.92 per cent APR - an increase of 130 per cent which means customers pay back more than double the amount of interest.  For loans of £5,000 the top 10 average rate was 5.83 per cent in 2006 while today it is 10.84 per cent, an increase of 86 per cent.

We are also seeing a growing gap between the lower tiered loans and the higher amounts; until April 2008 the correlation between tiers was very similar, however looking at the market today there's a 5.8 per cent APR difference between loans of £3,000 and £15,000.

Tim Moss, head of loans and debt at moneysupermarket.com said: "Following the FSA's decision last year to ban providers from selling single premium payment protection insurance on unsecured loans we knew the lenders would seek other ways of clawing back their profit.  Unfortunately, although not unexpectedly, providers are hitting consumers in the pocket by increasing their margins across the board. The days of cheap loans now seem a distant memory, as banks appear to be less willing to compete in the unsecured loans market, and it is those borrowers who are looking to borrow small amounts who have to pay more.

"As with all products our advice is to shop around and make sure you get the best deal. In many cases it is cheaper to borrower slightly more money on a personal loan because of the difference in APRs so it pays to be vigilant. Many providers are restricting their best deals to existing customers only, however even though loan rates are at their highest for some years there are still some competitive offers out there."

Top Tips

Have a look at the providers' tiers; it may be cheaper to borrow slightly more money. For example Sainsbury's Bank charges 15.7 per cent on a loan of £4,700 on which you would pay back £5,838 over 3 years. Borrowing an extra £300 would give you a rate of 8.8 per cent and you would repay just £5,679 - leaving you £159 better off

If you're looking for a smaller loan consider 0 per cent interest free offers or low rate credit cards as a good alternative

Most loan providers no longer offer payment protection insurance with their products. If you want to protect your repayments you can still do this through specialist insurers

Make sure your credit file is up to date before applying; you can get free trials from the credit agencies

Try not to borrow for longer than necessary or beyond the life of the product you are borrowing to purchase. For example if you are borrowing to buy a car and intend to change the car in three years time, consider taking out a loan of that length.