Personal loan rates hit ten year high

If you are shopping around for an unsecured loan then you may have discovered that personal loans are not as cheap as you thought they would be.  Despite the Bank of England Base rate having remained at its record low of 0.5 per cent for over two years, personal loan rates have risen consistently over recent months and now stand at a ten year high.

Our guide looks at why this is and at the importance of shopping around to get the best deal on your borrowing.

Personal loan rates reach highest level since 2000

The Financial Times recently reported that personal loan rates have risen to their highest level since May 2000.  The financial data provider Moneyfacts reports that the average interest rate on a personal loan of £5,000 is now 12.7 per cent, compared to just 7.8 per cent five years ago.

Part of the reason for the sharp rise in personal loan rates has been attributed to the recent court judgements regarding the sale of Payment Protection Insurance (PPI).  The FT reports that ‘in the past, banks subsidised the costs of personal loans by cross-selling the same consumers payment protection insurance (PPI).’

In April, the High Court dismissed an appeal brought by the banks against changes to regulations which would force them to refund billions of pounds of past policies.

With banks no longer being able to raise revenue through the sale of PPI, they have been forced to raise the interest rates on personal loans, which is bad news for borrowers.

Consumers urged to shop around for best personal loan deals

With the average interest rate on personal loans rising, consumers have been urged to do their homework and to shop around for the most competitive loan rates.  According to Moneyfacts, there is presently a £1,194 difference between the total repayments on the cheapest and most expensive £5,000 loan.  This means that consumers who fail to compare personal loans could end up paying hundreds of pounds more interest than they need to.

Michelle Slade from Moneyfacts said: “Most people’s first port of call for a loan is their bank, but in most cases this is far from the cheapest option.  The price war between supermarkets isn’t just on groceries, it has spilled over into the personal finance market.”

The FT reports that Sainsbury’s has the best persona loan rate in the market, with a £5,000 loan at 8.2 per cent or £156.47 a month.

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