Increase in personal loan rates costs consumers £1.2bn

22 August 2008

Average personal loan rate now at 7.4%

According to research by uSwitch the ‘best buy’ personal loan interest rates today stand at 7.4% APR, compared to 5.5% APR in January 2006, based on a loan of £8,000 borrowed over four years.

This would mean that an average loan of £7,194 borrowed over five years will cost £285.60 more today than in 2007 because of the increase in the APR which works out at a combined cost of £1.2bn.

Additionally, 13 months ago, 78% of all £10,000 loans borrowed over a five year period came with an APR of below 8%. However, last month only 40% of loans, and now only 26% of unsecured loans, come with an interest rate below 8%.

Not only has the credit crunch affected the level of interest being charged on loans, it has also affected the number of people being accepted for them.

According to research by GE Money Home Lending, up to 3.4 million borrowers in the UK have had their mortgage or loan applications rejected in the course of the last 18 months.

Simeon Linstead, head of personal finance at uSwitch, said: “The loans market is extremely volatile at the moment and best buy deals have become more expensive.

“However, the market is vast and there are still competitive rates for those who take the time to compare the offers available.

“Online loan deals are typically lower than their offline counterparts and in times of volatility in the credit markets and banking world, borrowing on a fixed rate loan can offer borrowers the peace of mind that both their interest rate and monthly payments are fixed for the term of the loan,” he added.

The uSwitch research also revealed that the interest rates of loans of £1,000, which traditionally come with a higher interest rate, have increased by 2.5% from 16.55% to 19.99% APR.

Mr Linstead added: “It has always been the case that consumers borrowing small amounts of money tend to get stung with high APRs.

“Over the past 13 months, rates on these tiers have seen the biggest hikes.

“Overall, we wouldn’t encourage consumers to take out a loan for a small amount such as £1,000,” he added.

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Why not read our blog: Small borrowing: is a loan the best option?