Borrowers beware - Loan rates reach record highs

If you thought that you could buy now and pay later by heaping the cost of Christmas on to store cards, credit cards and even dipping into your overdraft then it may be time to think again.

Those who plan on consolidating their debts with a cheap loan are likely to be in for a nasty surprise as research carried out at moneysupermarket.com found the average rate a borrower pays on a £5,000 loan has risen from 7.92% in the first week of September to 8.44% now.

The leap in loan rates has coincided with the falling Bank rate – the country’s official interest rate has been cut from 5% to 2% since October. This means that the gap between Bank rate and the average loan rate now stands at more than 6% - compared to 2.92% just two-and-a-half months ago.

Why are loan rates rising while Bank rate falls?

Cynics will suggest lenders are simply taking advantage of borrowers by not passing on the full effects of the recent Bank rate cuts. However there may be more to it than that as providers become increasingly wary about whom they lend to with household costs having leapt this year and the threat of redundancies looming large. Lenders are in effect pricing all but the most reliable borrowers out of the market.

Only Nationwide has bucked the trend in the last two weeks by slashing its rate on loans above £7,500 from 8.9% to 7.9%. However, chances are that long-term loan rates will continue to rise particularly following the Competition Commission’s recommendations on the sale of payment protection insurance (PPI).

The commission has proposed a ban on the sale of PPI by a distributor to a customer within 14 days of the distributor selling credit to that customer – removing the “point of sale” advantage. With more customers likely to drop PPI altogether or at least search for PPI from a stand-alone provider, loan companies will need to make up the shortfall somewhere else – and average loan rates may well break the 10% barrier as a result.

Are there any good deals out there?

As with any form of borrowing it pays to shop around and ensure you’re getting the best rate. At moneysupermarket.com we’ve launched our new-look loans channel with increased functionality and enhanced search tools making it easier than ever to compare deals like-for-like.

For a £5,000 loan over five years, Alliance & Leicester Personal Loan has a competitive rate of 8.8% with no arrangement fees and an early redemption charge at 30 days interest if the loan term was greater than 12 months. Tesco Loans and The AA Personal Loan have a typical APR of 8.9%.

For loans of £10,000, the Nationwide Personal Loan at 7.9% has no arrangement fees with an early redemption charge set at 28 days’ interest for loans 12 months or under and 58 days’ interest for loans greater than 12 months.

If you need to borrow more than £10,000 you could also consider a secured loan – assuming you’re a homeowner. These products are secured against your property, and as a result lenders tend to be willing to lend a larger amount. However, this also means that your home could be at risk if you fail to keep up with your loan repayments. The Platinum Exclusive Loan at 7.8% is the lowest secured loan rate in the UK and can only be found via moneysupermarket.com.

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Tips to find a competitive loan deal

Unfortunately the leading loan rates are only available to those with good credit scores. So how can you find the best deal for you? Here are our top five tips:

  • Build your credit rating: This can be as simple as paying bills on time and ensuring you’re registered on the electoral roll. Check out our video blog on 10 tips to beat the credit crunch for more ideas.

  • Search based on your credit score: By using our Smart Search tool you can search for loans based on an evaluation of your credit score helping you to avoid unnecessary applications for deals you don’t qualify for that would only further harm your credit profile.

  • Consider secured loans: If you have a poor credit rating you may find better rates from secured loan providers. However, always ensure you can meet the repayments in full each month or you may lose your property.

  • Shop around for PPI: PPI can provide welcome peace of mind, particularly in today’s difficult economic climate. You can compare PPI using our PPI comparison tool.

  • Search at the most opportune time: If may be worth waiting until New Year as loan providers may reduce some rates to compete for the business of customers who have made resolutions to put their finances in order.

Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.

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