Loan Rates Suddenly Leap

In the past fortnight, the cost of personal loans has shot upwards. We explain why and also reveal today's top deals.

In the past twelve months, the Bank of England has raised its base rate on five separate occasions, taking it from 4.50% a year to 5.75%. Naturally, these rate hikes increase the cost of borrowing for British banks, which duly pass on this extra cost to their borrowers in the form of higher interest rates on mortgages, personal loans, credit cards and overdrafts.

One particular trend which has gathered pace this year is the increasing cost of unsecured personal loans. Since late 2006, the interest rates charged by personal-loan providers have continued to climb. In the past fortnight alone, eighteen different lenders have increased their loan rates by as much as 4% APR, as the following table demonstrates:

Source: Moneyfacts

As you can see, the biggest rate rises have come from Norwich Union and RAC Financial Services (up to 4% hike) and six small building societies whose loans are funded by the Co-operative Bank (up to 3% hike).

Even the most aggressive players in this market (such as Alliance & Leicester, Barclaycard, Masterloan and Northern Rock) have pushed up their rates by a fraction in order to balance their books. In most cases, these increases have hit larger loans, typically those over £5,000, which could push up the total amount repayable (TAR) on a hefty loan by £200 or more.

Two factors are causing these large and continued rate rises. First, as I mentioned above, the rising base rate. Second, a squeeze on consumers' take-home pay is causing more and more borrowers to default on their debts, which is pushing up bad debts. Thus, in order to maintain their profit margins, lenders are forced to increase loan rates.

Nevertheless, if you're looking for a large loan (for example, for home improvements or a new car), the interest rates on Best Buy personal loans still compare favourably with mortgage lenders' standard variable rates (SVRs). What's more, an unsecured personal loan doesn't put your house on the line, because (unlike a mortgage, second mortgage or secured loan) it doesn't use your home as security.

Of course, I can't sign off without first producing the obligatory Best Buy tables for unsecured loans. My advice would be to read the twelve tips in The Loan Arranger Rides Again and then approach one of the lenders below (after shopping around and doing your own research, of course!):

Best Buy personal loans for £5,000 over three years

(without rip-off payment protection insurance)

Source: Fool.co.uk's independent, unbiased search engine for personal loans

Best Buy personal loans for £15,000 over five years

(without PPI)

Source: Fool.co.uk's independent, unbiased search engine for personal loans

One final word of warning: don't borrow more than you can comfortably afford to repay. That's the Foolish way!

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