Rising personal loan rate costs £1.2bn

Friday, 22 August 2008 12:01

Rising interest rates on personal loans could be costing consumers £1.2 billion in interest.

Findings from uSwitch.com show the best buy personal loan rates of January 2006 were at 5.5 per cent APR, while today they are at 7.4 per cent APR - based on a £8,000 loan over four years.

An average loan of £7,194 over five years will charge £285.60 more in interest today compared to last year - a combined cost of £1.2 billion.

Furthermore, while 13 months ago 78 per cent of all loans for £10,000 over five years had an APR of less than eight per cent, last month this stood at 40 per cent of loans and now just 26 per cent of unsecured deals fall below the eight per cent bar.

As well as pushing up interest rates, the credit crunch has also increased the number of people being turned down for loans.

As many as 3.4 million UK borrowers have been turned down at least once for a mortgage or loan in the past 18 months, GE Money Home Lending research revealed yesterday.

Simeon Linstead, head of personal finance expert at uSwitch, said: "The loans market is extremely volatile at the moment and best buy deals have become more expensive.
"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," he added.

The research also showed loans for £1,000 - traditionally with a higher interest rate - have increased from 16.55 per cent APR to 19.99 per cent APR.

"It has always been the case that consumers borrowing small amounts of money tend to get stung with high APRs," said Mr Linstead.

"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 £1,000. 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."

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