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Personal loans bitten by credit crunch

Interest rates on personal loans are following mortgages as the credit crunch starts to squeeze all borrowers.

In the last two week a number of firms have increased rates on personal loans including: Barclaycard (up 0.50 per cent), Lombard Direct (up 1.0 per cent), The AA (up 0.10 per cent), NatWest (up 2.50 per cent) and Tesco Personal Finance (up 0.6 per cent).

Barclaycard has also withdrawn its market-leading loan through its Masterloan brand.

Michelle Slade, analyst at Moneyfacts.co.uk, said: "It's not only mortgage rates that continue to increase, so too have the rates and monthly repayments on personal loans.

"Since the beginning of the year more than half of lenders offering personal loans have made changes to their rates.

"Black Horse has increased rates for those looking for smaller loans by as much as 11 per cent, adding £52.68 in additional interest over a year. NatWest has increased rates on the largest loans by 1.5 per cent, adding £1,015.20 to the total cost."

However, the upwards trend for interest rates on personal loans is not universal and some lenders have been cutting rates in recent months.

Ms Slade said: "Moneyback Bank, Britannia BS, Yorkshire Bank and Clydesdale Bank have all reduced selected rates since the beginning of the year.

"In fact anyone looking to take out a £5,000 loan with Yorkshire Bank or Clydesdale Bank will have seen rates reduced by as much as seven per cent."

Moneyfacts also issued a guide of key areas to focus on when choosing a personal loan.

• Typical rates Most lenders advertise typical rates but, for some this is the typical rate for larger loan amounts.
  
  The rate for a smaller loan may be much higher, so check the rate they offer for the appropriate amount you want to borrow.


• The rate you see may not be the rate you get A typical rate has to be offered to at least 66 per cent of accepted customers. This means 34 per cent of customers may be charged a higher rate.


• Payment Protection Insurance Taking PPI from the loan provider is very expensive and can add thousands of pounds to your loan. If you do require protection, opt for an independent loan provider.


• Shop around Don't just assume your bank will offer you the best deal.
  
  However, don't make multiple applications as these will leave a mark on your credit file which may mean you get offered a higher rate or get declined completely.

Daniel Barnes