If you need to borrow money but don't want to pay through the nose for it, here's how to avoid the rip-off rates.
The big banks are at it again. Despite the fact that the base rate is at a 300-year low, new lending figures from the Bank of England released this month show that rates for personal loans have hit a 10-year high.
The average rate on an unsecured £5,000 loan paid back over three years is currently a massive 12.4%. Yet the Bank of England base rate - one of the two main factors (the other is Libor, the rate at which banks lend to each other) that determine how much we pay to borrow - has remained at an all-time low of 0.5% since March 2009. So loans are a massive 11.9% higher than the base rate.
Back in January 2007, before the credit crunch took hold, the cheapest personal loan rate was just 5.8% - a mere 0.55% above base rate at that time. Now, with our banks spooked by the prospect of customer defaults and banned from selling costly-but-near-useless PPI products, the cost of borrowing has soared - so what should you do?
If you're confident you have a solid credit rating you could apply for one of the few remaining competitive loan deals on the market. For those wanting to borrow £5,000 over five years, the best deals are available from Alliance & Leicester and Santander or from Tesco Bank or First Direct - all four come with a typical APR of 8.9%. That adds up to £1,213 paid in interest over the life of the loan.
But if you don't have a near-immaculate credit rating you need to explore other options.
Find an interest-free credit card
If you're armed with a healthy credit rating and a little financial discipline, you may not have to pay your bank anything for the privilege of borrowing. Despite the turmoil that's engulfed the banking sector over the past couple of years, there is still a decent array of interest-free credit cards available.
The downside is that you'll have little more than a year to clear the debt within the 0 per cent offer period, unlike a loan, where you can spread the repayment period. But being free of interest is a worthwhile sacrifice - and you can, of course, take total control of your finances with the help of our free Online Banking tool.
You'll want to look for a card that offers the longest offer period on new purchases, to give you the longest time to repay. And of course, if you haven't cleared the debt at the end of the offer period, you could switch to another interest-free deal in exchange for a 3% premium - keep a careful eye on when your 0% offer is up.
The best interest-free purchases card is the Tesco Clubcard Credit Card, which offers 0% on purchases for 12 months, followed by the Sainsbury's Finance MasterCard, which offers 10 months interest-free purchases.
If you don't want to mix and match credit cards or repay your debt against the clock, you might want to opt for a card that offers a permanent low rate of interest. These deals can still be cheaper than personal loans - the current best buys are the MBNA Platinum Low Rate American Express at 6.7% APR (typical) and the Barclaycard Platinum Simplicity Visa, which comes with a typical APR of 7.8%.
Look beyond the banks
If you are worried that your credit rating is weak, you may not even have to go to a bank to borrow at a reasonable rate. You could look to a Credit Union - these institutions act as financial co-operatives and are usually set up by local or trade bodies. They primarily offer good-value savings and loans deals, but some are expanding into current accounts and ISAs.
Credit unions typically charge a rate of 1% a month on loans. That works out at an APR of 12.7% on the reducing balance of the loan - not the entire sum. So, although 12.7% APR looks much like the rates offered by the banks, the interest payable would decrease in time.
What's more, there are no penalties for repaying the loan early and life insurance comes with each product as standard.
On small sums, this works out cheaper - if you borrowed £1,000 over one year, you would repay no more than £1067 in total. To find out more and find a credit union near you, visit the website of the Association of British Credit Unions Ltd.
Another alternative is peer-to-peer lending network Zopa. The site works as a marketplace where people lend and borrow money to and from each other, sidestepping the banks. The company itself makes money by charging both lenders and borrowers - borrowers pay a fee of £118.50 on top of interest charges, while lenders pay a 1% annual service fee.
The site is fully regulated and categorises borrowers according to its own credit scoring criteria. Yet rates are not that much better than those on offer from the big banks - a borrower with an A* credit rating according to the Zopa system would pay 9.8% on a £5,000 over five years. A C-rated borrower would pay 13.9% on the same loan.
Compare personal loans at lovemoney.com