Say Goodbye To Cheap Personal Loans!

As we forecast earlier this year, personal loans are getting more expensive. Even so, we show you how to track down a bargain.

Last November, in The Last Of The Low-Rate Loans, I made what I considered at the time to be a one-way bet.

I warned Fool readers that, thanks to rising bad debts and hikes to the Bank of England's base rate, I expected lenders to increase the interest rates they charge on personal loans. Sure enough, within a few weeks of my writing the above article, loan rates began to rise -- and have continued to do so throughout the first five months of 2007.

This trend is graphically illustrated by the fact that, in mid-2006, borrowers could choose between ten personal loans with interest rates below 6% APR, whereas today there are no loans available at 6% or less. This is hardly surprising, given that the Bank of England's base rate has increased four times since last August, rising from 4.50% a year to its current level of 5.50%.

Following the increase to the Bank's base rate on 10 May, the only remaining sub-6% APR loan was withdrawn last week, when table-topping lender Masterloan increased its typical rate from 5.9% APR to 6.1% APR. (If you don't know what a typical rate is, then read 'Typical' Rates Are Hardly Typical.)

As you'd expect, the Best Buy table for personal loans now looks very different to what it did six months ago. Here are the top six entrants to the latest lending 'Hall of Fame':

Cheapest personal loans

(to borrow £5,000 over three years, without rip-off payment protection insurance)

Source: the Fool's personal loan search.

* £35 fee for same-day funds transferred via CHAPS.

Now here's a question for you: with the base rate at 5.50% a year, how on earth can lenders make money by lending at just 0.6% a year above this level? The simple answer is that they can't. The nasty truth about unsecured loans is that interest rates are kept artificially low because lenders make such vast profits from selling overpriced, payment protection insurance (PPI).

I've warned Fool readers of the shortcomings of loan insurance many times, most recently in this article. On average, buying PPI can add upwards of £800 to the cost of a £5,000 loan, making it a sixth (16%) more expensive. Of this £800, roughly £650 will be shared as profit between lender and insurer, with the lender taking the lion's share. Hence, with loan PPI, you're paying £800 for a policy which should cost closer to £150. So, if you want to be taken for a ride when arranging a loan, then simply agree to buy PPI!

On the other hand, if you want to find your perfect personal loan, then take the time to shop around. As an ex-banker, I revealed my twelve tips to finding a bargain loan in The Loan Arranger Rides Again. Finally, by visiting the Fool's personal loans centre and applying online, you'll have your money within days.

I'll leave you with a Foolish wealth warning:

"Only a fool (note the small 'f') borrows more than s/he can comfortably afford to repay."

Ignore these wise words at your peril!