Is it really still hard to get a personal loan?
Personal loan rates are rising and they are harder to get. Or at least that is how it seems.
Daniel Barnes looks at the market for personal loans and whether they harder to get now than ever before.
The Bank of England has the base rate now anchored at 0.5 per cent but personal loan rates are way ahead.
This is due to the fact lenders don't follow the Bank of England so closely when setting interest rates for unsecured debt like personal loans, credit cards and overdrafts.
Instead they look at the risk involved in lending when the debt is unsecured - as there is no house to repossess if the borrower defaults.
In times of recession, more people lose their jobs - with predictions of unemployment rising over three million in 2010 ¬- and so more people default on loans.
With this the case, interest rates can go up.
Data from the Bank show personal loan rates have risen in the last month.
The average rate on a £10,000 personal loan was up 0.87 percentage points to 10.32 per cent in June.
A year ago the average rate was 8.53 per cent.
For a £5,000 loan the average rate in June was 12.04 per cent - compared to 10.46 per cent a year ago and the highest level since the Bank's records started in 2005.
How to get the best deal
It used to be the best route to get the best personal loan rate was to shop around.
However, some of the best deals at the moment are saved for banks and building societies own customers.
Perhaps the key is to shop around, but also not be afraid to ask what your own bank has on offer.
The reason is your bank knows your personal credit history and so can make a more in depth analysis of your finances.
Figures from uSwitch show there are 13 personal deals available for existing customers at an average APR of 8.5 per cent.
Louise Bond, at uSwitch, says: "At the moment, loyalty really is king and many consumers could find a preferential loan rate with their existing provider.
"It's definitely worth finding out what they can offer you before you search the rest of the market."
Supermarket loan sweep
While your own bank might have a good deal for customers only, providers outside the traditional banking sphere are leading the way.
Sainsbury's Finance and Tesco Personal Finance are offering personal loan deals from 7.9 per cent.
Asda and Marks & Spencer Money also offer deals high in the best buy tables.
Samantha Owens at Moneyfacts.co.uk explains supermarkets have always been competitive offering deals via the telephone and internet.
And while traditional banking has suffered through the credit crisis, they have stood up.
"They remain a trusted name and are very recognisable for consumers," she explained.
David Walker, loans manager at Sainsbury's Finance, is still seeing "a high demand from customers who are interested in taking out a loan", as its rates are remaining competitive.
"Sainsbury's Finance has always had a policy of responsible lending and, of course, this has continued during the recession."
He adds the amount people wanted to borrow was down on last year.
"The most popular reasons cited by people who are taking out loans are for debt consolidation, followed by home improvements," he said. "However, we continue to see other reasons given, including holidays, cars, weddings and medical / dental treatments."
Are lenders tightening lending rules?
The Bank of England's Credit Condition Survey published this month shows in the second quarter of 2009 lenders had reduced the amount of unsecured credit available - and by more than they had expected to do.
Over the coming three months, lenders told the central bank they would reduce unsecured lending further.
However, lenders also saw demand for unsecured loans drop and expect them to fall further.
There are two possible reasons why demand for loans have dropped.
As people become fearful of the effects of the recession on their finances, they just don't want to borrow and put themselves at greater risk. Economic downturns traditionally see people starting to save move, and after the credit binge of the boom years people are trying to clear their debts.
Also as rates on loans rise, some people just think it is too expensive to borrow.
Ms Owens explains there is currently not a great amount of activity or competition in the personal loans market.
"Supply has definitely reduced," she said, pointing to a number of loan suppliers that have moved out of the market.
Moneyfacts says there is a 37 per cent drop in the number of personal loan lenders in the market.
AA has confirmed it recently withdrew its loans from the website, although is still offering deals over the phone, as it aims to switch providers from HBOS - now part of Lloyds Banking which it has been with for 23 years - to a new firm.
It promises a relaunch later in the year.
Ms Owens says she expects loan rates to creep up in the coming months, but not in the way credit card interest rates have risen.
However, rates have risen from when the base rate was five per cent to close to ten per cent now when the bas rate is 0.5 per cent - so creating a fatter margin for lenders.
Lenders want you to borrow less
It used to be lenders offer lower rates the more you borrowed.
During the credit boom by borrowing more the interest rates could be lower - to the point in some cases borrowing a little more could be cheaper.
But this is now in reverse.
"Rates can now be more if you borrow more," says Ms Owen. "This is so people only borrow what they need."
Halifax has person loan rates of 8.9 per cent for deals between £7,000 and £15,000, and rates from 10.9 per cent for loans from £15,001 to £25,000.
The Co-operative Bank has a rate of 8.9 per cent on loans of £7,500 to £14,950 but 9.9 per cent on loans of £15,000 to £25,000.
Average best buy rates, according to Moneyfacts, for loans of £5,000 over three years are at 8.77 per cent.
Co-op explains this is in part due to the bank following the rest of the market and the higher risk associated at the moment with higher loan rates.
Donna Earnshaw, loans product manager at Co-operative Bank, explains when setting the rates on loans on the market, future interest rates and risks before "pricing accordingly".
"In the loan market there is not the aggressive competition as it was. Lenders are being more cautious," she says.
"We look at the cost of setting up the loan, and the risk, which has increased over the past couple of years."
At the Co-operative, there has been no fall in demand for personal loans and Ms Earnshaw claims customers are as likely to get a loan now as 12 months ago as lending criteria have not been tightened.
"There is a lot in the press about it becoming more difficult to get credit, but it depends on the lender, some lenders have pulled out."
Personal pricing
When loan providers advertise a rate they must provide it for 66 per cent of customers.
Some lenders are now choosing not to advertise rates and provide personal pricing.
This means they look at your credit history and set a rate to your needs.
For those with less than perfect credit rating it may mean there is a greater chance of being accepted, explains Ms Owen.
"However, the rate might not be what you are willing to accept. But for those with good credit histories they could find they are offered a lower rate than those advertised on the market."
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