Loan Rates Rocket

Need a loan? Expect to pay more.

This article was first sent to Fools as part of our 'The Good, The Bad and The Ugly' email campaign.

The last month has not exactly been a bed of roses for any sector of financial services, but the mortgage market has dominated the headlines. However, it's not just the homeloan sector where it is difficult to borrow competitively -- the credit crunch has been crunching all types of credit, and unsecured personal loans were hit particularly hard last month.

An unsecured personal loan is the standard type of loan you might take out for all sorts of purposes, from a new bathroom to a Mediterranean cruise. Unlike a mortgage or a secured loan, you do not have to offer up anything as security against the debt (the clue is in the name). Effectively you just promise to pay it back (and sign a contract).

You can choose the amount you want to borrow and a repayment term to suit your needs and the provider is usually not too fussed about what you need the money for. They will check your finances (though not extensively) and run a credit check and, as long as you can afford the repayments and fit their risk criteria, hey presto -- an affordable way to borrow money quickly.

The problem is, loans are not very affordable any more.

On the up

Recent research has show that loan rates went up last month by as much as 9%, with a raft of lenders increasing their rates. Plus the total number of loans available dropped from 56 to 52 in the month - a far cry from the choice on offer this time last year.

To be fair, the figures are exaggerated somewhat by the rate increases from one lender, Black Horse, (owned by Lloyds TSB), which were larger than the rest of the market. The company, which specialises in retail point-of-sale finance (for example motor finance when you buy a car), offers personal loans but the rates are uncompetitive and have recently increased significantly.

While the mainstream providers charge less, they have also put their rates up. For example, according to uSwitch the following increases have been made in the last month:

• Black Horse increased rates by up to 9% - up to 36.9% APR for loans of £1,000-£2,999 and 25.9% APR for loans of £5,000-£7,499
• Bank of Ireland raised rates 1.8% from 8.9% APR to 10.7% APR
• Lloyds TSB, Marks and Spencer have all increased unsecured personal loans by 1%
• Barclaycard (from 7.8% APR to 8.4% APR, up 0.60%)
• Asda (from 7.4% APR to 7.9% APR, up 0.5%)
• Sainsbury's Finance (from 7.7% APR to 7.9% APR, up 0.2%)

This increase in rates is due to the fact that it is costing banks more to borrow money themselves so they are passing that cost on to consumers. There is no way of knowing what is going to happen next as the market is so volatile, although a Base Rate cut on Thursday could provide some much-needed relief for borrowers.

Are there any good deals left?

Yes there are, in fact there are even some rates left under 8% (at time of writing) but the unsecured loan sector is, like the mortgage market, unpredictable with rates being changed every day and different lenders moving quickly up and down the best buy tables.

The best advice is to shop around, and then shop around again. Even if you read somewhere that a lender offers the best rate, or you researched the market a week ago, do you research again on the day you apply as it could well have changed.

While there are no longer any loans left under 7% there are a handful of deals below 8%.

Some of the best deals currently available for borrowing £5,000 over five years are:

Provider APR

The Post Office 7.9%

Moneyback bank 8.4%

Barclaycard 8.4%

The AA 8.5%

Sainsbury's Bank 8.8%

A&L 8.7%

And for borrowing of £10,000 the most competitive rates are currently:

Provider APR

Moneyback bank 7.8%

Barclays bank 7.9%

The AA 7.9%

Tesco 7.9%

The Post office 7.9%

Asda 7.9%

Sainsbury's Bank 7.9%

It's worth reiterating that the rates above may not be available for long, so do some research yourself or check out The Fool's Loan comparison service where you can search for deals to suit your circumstances.

Word to the wise Fools

Finally, one thing to bear in mind when taking out any loan is that is likely the provider will offer you payment protection insurance (PPI) which covers your monthly repayments if you are unable to work due to accident, sickness or unemployment.

While many people have no doubt been glad of this protection in the past, it is worth considering that this insurance is very controversial. The Office of Fair Trading recently found problems in the sector and referred it to the Competition Commission which is currently undergoing an official Inquiry into the sector, looking at anti-competitiveness and misselling among other problems. In addition, the Financial Services Authority announced last week that in a mystery shopping exercise the product was frequently missold, and Which? came out with a damning report on the product last month.

All in all, this can be an expensive insurance, and it may not be necessary. Most importantly you DO NOT NEED to take it out from the company that is offering the loan. Shop around for a cheaper protection deal, such as those from Motley Fool partner British Insurance.

More: The End Is Nigh For PPI