Personal Loans Are Getting Pricier

The credit crunch isn't just hitting mortgage borrowers. In 2008, unsecured loans have become costlier, too...

British homeowners know only too well how hard the worldwide credit crunch is hitting home. The Bank of England cut its base rate by a quarter-point (0.25%) last Thursday, its third cut since December. However, thanks to severe problems in the inter-bank lending market, mortgages are now more, not less, expensive than they were a year ago.

Furthermore, these stresses and strains are not confined only to the mortgage market. Credit-card issuers and personal-loan providers are feeling the strain, too. To demonstrate this, I asked Fool partner Moneyfacts for a list of all changes to the interest rates charged by personal loans so far in 2008.

Alas, this list was ten pages long, which made trawling through it hard work! Some lenders have fiddled with their loan rates up to five times in 2008, while others have withdrawn from the market altogether. Then again, a few leading players have at times trimmed their rates in order to win market share. Instead of reproducing the entire list, here is a selection of significant rate changes and departures:

*Lender*	*APR changes in 2008*
The AA	Two increases of 0.1% on larger loans (and two decreases, including a cut of up to 0.7% on 3 January)
Alliance & Leicester	Five changes, including a reduction of up to 1% on 5 March followed by an increase of 0.3% to 2% on 17 March
Bank of Scotland	Increased rates by up to 1.4% on 4 March
Barclays	A cut of up to 3% on 7 January, followed later by an increase of 0.5% on 2 March
Britannia BS	Rates cut by up to 3% from 8 January
Clydesdale Bank	Rates increased by up to 1% on 8 April
Coventry BS	Rates increased by up to 3% on 31 March
First Trust Bank (NI)	Rates increased by up to 2.8% on 28 January, and by up to 2% on 7 January
Goldfish	Pulled out on 31 December 2007
Halifax	Rates increased by up to 1.4% on 4 March
Intelligent Finance	Rates increased by up to 0.9% on 7 March (telephone) and by up to 1.3% on 4 March (online)
Lloyds TSB	Rates increased by up to 1% on 11 March
Moneyback Bank	Rates increased by up to 0.7% on 17 March; rates reduced by up to 2.7% on 14 January
NatWest	Rates increased by up to 2.5% on 7 April, and by up to 2% on 25 February
Northern Rock	Pulled out on 18 March, after raising rates by 2% on 12 March
Norwich Union	Pulled out on 1 January
RAC Financial Services	Pulled out on 1 January
Royal Bank of Scotland	Rates increased by up to 2% on 25 February; switched to individual pricing on 7 January
Sainsbury's Bank	Rates increased by up to 0.9% on 1 April; up to 0.9% on 27 March; up to 0.8% on 19 February; by up to 1.4% on 17 January
Tesco Personal Finance	Rates increased by up to 0.6% on 9 April
Ulster Bank (NI)	Rates increased by up to 1% on 5 February
Yorkshire Bank	Rates increased by up to 1% on 8 April
Yourpersonalloan	Rates increased by 0.2% on 10 January

As usual, there was a strong `January Sale' effect earlier in the year, when lenders slashed their rates to win a larger slice of the yearly post-Christmas borrowing binge. However, these bargains were short-lived. Since then, the rate trend has been strongly upwards, with lenders raising rates in order to increase their wafer-thin profit margins.

A few rate rises in early March seem to have created a `domino effect', with lenders repeatedly hiking their rates since then. There has been a lot of chopping and changing, with some lenders re-jigging rates across the board. Some have been making smaller loans (under £5,000) more expensive, while others have raised rates on larger loans (over £15,000). Also, rate rises have varied across telephone and online lending, new and existing customers, and so on.

The quitters

The above research clears shows that lenders' reduced appetite for risk has led them to make personal loans less attractive. Some lenders have made their offers remarkably uncompetitive, in order to dodge the Best Buy tables and turn away customers. What's more, three lenders completely withdrew at the start of the year, duly followed by the mortally wounded Northern Rock in mid-March.

In summary, it's abundantly clear that, despite recent base-rate cuts, personal loans are getting more expensive. What's more, this trend may continue throughout 2008, as lenders seek to manage risk better. Hence, it's more important than ever to tread carefully when choosing a personal loan. These twelve tips from the Loan Arranger will help!

More: Find your perfect personal loan via the Fool | Killing Credit Cards With A Loan | Pricey Personal Loans