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Loan warning as rates hit ten year high

Loan warning as rates hit ten year high

Category: Loans

Updated: 14/12/2012
First Published: 23/05/2011

MONEYFACTS ARCHIVE
This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Borrowers have been urged to shop around before they borrow money after rates on personal loans reached their highest level for more than a decade.

New research by Moneyfacts.co.uk shows the average rate on a £5,000 loan now stands at 12.7%, the highest level since May 2000.

The average pricing on personal loans has fluctuated widely over the last ten years, with rates falling to as low as 7.8% in May 2006.

However, the cost of borrowing has been on the rise ever since, and is fast approaching the average loan rate of 13.1% seen in May 2000.

Explaining the reasons behind the soaring rates, Michelle Slade, spokesperson for Moneyfacts.co.uk, said that unlike on a mortgage, providers have no security that a personal loan debt will be repaid.

"In a market where household finances are being stretched, the risk of customers not repaying the loan increases and this is passed onto customers through higher loan rates," she added.

"A few years ago, lenders offset low loan rates by recouping revenue through payment protection insurance, but recent judgements mean this is no longer possible."

The research also showed there is currently a £1,194 difference between the cheapest and most expensive £5,000 loan.

With advertised representative loan rates only having to be offered to half of successful applicants, Ms Slade said some customers could find they are offered higher rates than those shown.

"Most people's first port of call for a loan is their bank, but in most cases this is far from the cheapest option," she added.

"The price war between supermarkets isn't just on groceries, it has spilled over into the personal finance market.

"On nearly all loan amounts the supermarkets have the most competitive rates."

Sainsbury's Finance and Tesco Bank are both major players in the personal loan market.

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