Personal loan rates at nine year high

Tuesday, 02 February 2010 11:26

By Matthew West

Interest rates for personal loans are at a nine year high despite the Bank of England bank rate being at an all time low research by comparison website Moneyfacts has revealed.

The average interest rate for a personal loan of £5000 over three years now stands at 12.4%, despite the Bank of England base rate being only 0.5% for the last 10 months.

As a result the average personal loan rate has risen 4.6 per cent since February 2006, adding £350 to the cost of repaying £5,000 over a three year period. Over the same period the base rate fell 5 per cent.

The findings emerged as the Bank of England indicated that consumer borrowing rose for the first time in six months. Total borrowing grew by £1.2billion in December - twice the average for the past six months.

The rise in rates has been blamed on nervousness within the banking sector with most banks only willing to lend to their own customers and then only those with a near perfect credit score.

Moneyfacts said risk was still the greatest factor unpinning lending decisions and that as personal loans were not secured against assets such a property they had seen some of the steepest increases in interest rates.

It added a further indication that banks were unwilling to lend money to individuals was the fact that the traditional post Christmas personal loans sale - whereby banks often reduce their rates in order to attract new customers - had not materialised.

Michelle Slade, spokesperson for Moneyfacts.co.uk said: "In such a risk adverse market, lenders are only offering loans to the most creditworthy applicants and then at a premium.

"Unemployment remains high and when people are struggling to meet repayments, unsecured lending is one of the first debts they stop repaying.

"The majority of lenders advertise typical rates, so borrowers shouldn't be surprised if they have to pay a higher personal loan rate than that shown.

"With a £1,055 difference between the cheapest and most expensive £5,000 personal loan, shopping around is key."

Andrew Hagger, a spokesman for Moneynet.co.uk, added: "With banks and building societies still adopting a far more cautious stance even when it comes to mortgage lending, even with your property as collateral, it's no surprise that the appetite for unsecured lending has pretty much dried up."

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