Personal loan rates hit 7-year high

6:15pm Monday 18th August 2008

Personal loan rates have hit a seven-year high as lenders continue to hike the cost of the deals in the face of the credit crunch.

Financial information group Moneyfacts.co.uk said the best personal loan rate currently available for someone borrowing £5,000 over three years was 7.6%.

It said this was the highest best buy rate since 2001, and well up on a leading rate of 6.3% in August last year and a recent low of 5.6% in August 2006.

Michelle Slade, analyst at Moneyfacts.co.uk, said: "In the last few years the market for personal loans has been extremely competitive as lenders and borrowers alike 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% from 8.1% to around 11% 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 generally more likely to default on than a mortgage if they run into financial difficulties.

Ms 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 still.

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

She urged people who were planning to take out a loan to shop around for the best deal, adding that the difference between the cheapest and the most expensive £5,000 loan was currently £25.55 a month or £919.80 over a three year term.