Personal loan rates at nine-year high
Personal loan rates have hit a nine-year high despite the record-low Bank of England base rate.
The average personal loan rate is currently 12.4% - a shocking 11.9% above the base rate. In contrast, when loan rates last peaked in January 2001, the average loan rate was also 12.4%. However, the base rate was 6% - its highest point in the last decade.
Personal loan rates have rocketed on the back of the credit crunch, with lenders upping rates to reflect the higher risk of borrowers failing to meet their loan commitments.
Rising unemployment and stretched household budgets mean unsecured debts – such as personal loans – tend to be one of the first debts they stop repaying.
“Unlike on a mortgage, there is no security that a personal loan debt will be repaid,” explains Michelle Slade, spokeswoman at data provider Moneyfacts, which compiled the research. “In such a risk-averse market, lenders are only offering loans to the most creditworthy applicants and then at a premium.”
Despite the recession ending at the end of last year, and better-than-expected unemployment figures, Slade says lenders continue to show a distinct lack of appetite for lending.
"The post-Christmas loan sales that we see each January did not materialise, a further indication that lenders do not want to encourage unsecured lending,” she adds.
Alliance & Leicester currently offers the most competitive personal loan rate 8.9% - 8.4% above base. Back in January 2001, the best loan rate on offer was 9.4% from Northern Rock, which was 3.4% above base rate (see table below)
Moneyfacts reports there is currently a £1,055 difference between the cheapest and most expensive £5,000 loan.
In addition, although most lenders advertise typical interest rates, they only have to offer these to two-thirds of borrowers. This means that many applicants won’t be offered the rate on offer – however, if they then apply for another loan, their credit record could be damaged.
Andrew Hagger, spokesman for comparison service Moneynet, says the new rules mean lenders can no sell payment protection insurance (PPI) to subsidise lower loan rates.
He explains: “In January 2007 - before the credit crunch took hold - personal loan rates were being offered at 5.8%, which was a mere 0.55% above base rate at that time.
"Clearly with such ultra thin margins these rates were not sustainable and any defaults would soon wipe out the profit margin on the loan itself – it would have been the PPI income that made lending viable at that time.”
|January 2010||Alliance & Leicester||8.9%|
|January 2008||Moneyback Bank||6.7%|
|January 2007||Northern Rock||5.8%|
|January 2006||Moneyback Bank||5.7%|
|January 2005||Alliance & Leicester||5.9%|
|January 2004||Northern Rock||6%|
|January 2003||Northern Rock||6.9%|
|January 2002||Northern Rock||7.9%|
|January 2001||Northern Rock||9.4%|
Source: Moneyfacts 01/February/2010
Payment protection insurance is designed to cover you should you fall ill, have an accident or lose your job and can’t make repayments on loans or credit cards. However, research by consumer watchdogs found the cover to be overpriced, filled with exclusions (policies exclude self-employment, contract employees and pre-existing medical conditions) and were often mis-sold because the exclusions were never fully explained. In May 2011, the High Court ruled banks had knowingly mis-sold PPI and ordered them to compensate around two million consumers.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.
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