Personal Loans: Up Close – And Jolly Expensive

October 9th, 2007

Despite the Bank of England holding base rate unchanged at 5.75 per cent this week, borrowers have seen the cost of personal loans rise by up to four percentage points as the impact of the credit crunch hits home. Nine banks have raised the rates charged on personal loans this week, say independent statisticians Moneyfacts.

Rates have already shot up by almost a quarter over the last year, according to figures released by the Bank of England this week.

However, this statistic does not take into account this week’s rises.

Bradford & Bingley increased what it charges on loans of between £2,000 and £2,950 by four percentage points to 17.9 per cent. It also increased rates when borrowing from £5,000 to £7,450 by 3.2 percentage points to 9.9 per cent .

A Bradford & Bingley spokeswoman said that the group had frozen its loan rates for the past 18 months, but had now increased them after five interest rate rises in the past year, as well as higher borrowing costs due to the current turmoil in financial markets.

The Cheshire and Derbyshire Building Societies both raised rates on loans between £5,000 and £7,450 by a third to 9.9 per cent .

Crisis-hit bank Northern Rock added half a percentage point to the interest charged on its personal loans, pushing the rate for all amounts borrowed up to 7.9 per cent .

A borrower taking out a £5,000 loan from the Cheshire at 9.9 per cent would now pay £161 a month against £154 on the old rate of 6.9 per cent , which over a three-year term would add an extra £255.

The increases only affect new customers and not existing ones.

Experts blame the rate rises on increasing uncertainty in the financial markets, rising levels of bad debt and a year of interest rate rises putting pressure on disposable income.

Lisa Taylor, analyst at Moneyfacts, said: “It comes as no surprise to see lenders increasing their lending margins in what has become a far more risky environment to do business.”

Borrowers should look around for the best rates because choosing the wrong loan means you could end up paying more than twice the amount you need to in interest. The cheapest unsecured personal loan when borrowing £5,000 over three years would cost you £152 a month from Yourpersonalloan.co.uk, at a rate of 6.3 per cent .

Yet if you borrowed the same amount at a more expensive rate of 12.9 per cent from insurer LV=, previously known as Liverpool Victoria, it would cost £167 a month, adding an extra £513 to your bill over three years.

Instead of the “buy now, pay later” mentality that has dominated the high street in recent years, financial advisers recommended saving up to make a purchase rather than relying on credit.

Sue Hannums, of independent financial advisers AWD Chase de Vere, said: “We have been lucky in recent years with low interest rates, which means borrowing has been cheap. But the tables have now turned. Borrowing is not that cheap any more and people need to look at other options. Now is the time to start saving up to buy things, instead of using credit.”

Anyone who finds themselves overstretched should draw up a budget to find out where they are spending their money and how they can make savings on everything from their utility and mobile phone bills to their weekly food shopping.

Philippa Gee, of IFAs Torquil Clark, also advised borrowers to reign in their spending. She said: “Rate rises on personal loans are not the only increase in costs that will hit the family budget.

“In the months ahead, many homeowners are going to be hit with higher interest rates on their mortgage and there is also Christmas ahead which is always an expensive time of year. If the credit crunch continues, we are likely to see more rate rises. You need to reduce your debts as soon as possible, starting with those with the highest interest rate such as credit and store cards, and limit your spending and expenditure as much as possible.”

Ms Taylor added: “The golden rule for any form of debt consolidation is to cancel, close and cut up your existing forms of credit.”

Golden rules

Look around for the lowest interest rate, or risk paying hundreds of pounds more than you need to over the term of the loan.

Avoid further borrowing if you take out a loan to consolidate debts, by cancelling existing forms of credit, and not extending credit card and overdraft limits

Resist the “buy now, pay later” mentality by saving up to buy goods and services, rather than using credit

Consider your expenditure and look at where you can make savings

Draw up a monthly budget and stick to it

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Personal Loans: Up Close – And Jolly Expensive

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