Decent Loans Are Dying Out

Finding a personal loan is getting tougher, as lenders raise interest rates or pull out completely. Here's the latest disturbing news.

In The Incredible Shrinking Mortgage Market, I warned that increasingly wary mortgage lenders have withdrawn thousands of home loans. However, the impact of the worldwide credit crunch isn't just being felt in the mortgage market. Lenders are becoming more cautious across the board, making it harder to get unsecured (non-mortgage) credit.

For example, some credit-card issuers are turning down around half of all new applications, and there are problems in the market for personal loans, too. Indeed, according to Fool partner Moneyfacts, rates are rising and loans are being withdrawn across the personal-loan market. Here's a list of the lenders to exit this arena so far this month:

LV= (formerly Liverpool Victoria) withdrew yesterday;
GE Money pulled out earlier this week (it charged a very competitive 6.9% APR on loans of £7,500+); and
Leeds BS withdrew at the end of last week, leaving gaps near the top of the Best Buy tables.

Furthermore, credit wariness has spread to providers of secured loans (which put your home at risk if you don't keep up the repayments). LoanOne and SPPL have pulled out, and Money Partners will withdraw its loan range tomorrow (9 November).

So, why are loan providers backing out of the market or increasing their interest rates? I can think of at least four reasons:

Loan rates have been rising since the Bank of England started hiking its Base Rate. Since August 2006, the Base Rate has risen from 4.5% a year to 5.75%, with knock-on effects across all consumer lending.
Lenders are becoming much more risk-averse. Due to the US subprime mortgage crisis, there is far less appetite in the money markets for sub-prime debt.
This tighter inter-bank lending is making it tricky to borrow cheap money from other lenders. This problem did for Northern Rock, although the Rock won't be the last victim of the `credit crunch'.
The ongoing Competition Commission investigation into payment protection insurance (PPI), see Reclaiming Rip-Off Insurance Premiums. Lenders are fearful that the £4 billion a year they pocket from selling rip-off loan protection could be threatened when the Commission releases its recommendations in 2008. The huge margins enjoyed by lenders selling PPI help to subside interest rates, so lower PPI profits would mean more expensive loans for everyone.

In summary, it's getting harder and harder to borrow at reasonable rates of interest, especially for smaller sums. I fully expect this vicious circle to continue well into 2008, making loans even more expensive. Hence, if you are on the lookout for a low-cost loan, then I'd advise you to act sooner rather than later. Before you do, read my latest quick tips to help you choose the perfect personal loan in How To Find A Cheap Loan.

Finally, a warning about not borrowing more than you can comfortably afford to repay. Since the turn of the century, cheap credit has encouraged millions of us to spend more than we earn. However, it's pretty clear that `easy credit' is now turning into `tough debt', so be very wary of spending tomorrow's money to support today's lifestyle. Living beyond your means is not the Foolish way!

More: Use the Fool to find lovelier loans | How To Get Cheaper Loans