Personal loan rates have soared over the past three years despite the base rate being at an all-time low.
Research by Defaqto found the average unsecured personal loan rate has increased from 8.8% in 2007 to 12.9% today.
Kevin Bray, insight analyst for banking at Defaqto, says: "The increasing cost of unsecured lending reflects the lack of appetite for risk in this area with many providers suffering from high arrears and default rates. Additionally the number of providers has reduced by a third since 2007 and of those remaining the focus has been on offering unsecured products to their existing customers.
"There is some good news for consumers, following the recent announcement from the government about changes to credit card rules and in particular how payments are allocated.
"From January 2011 providers must allocate payments to the transactions attracting the highest rate of interest and this is expected to collectively save consumers between £300 million and £500 million."
The good news is that if you shop around, it’s still possible to find a competitive personal loan.
So what's the best way to find a personal loan that will work for you?
• Shop around. Personal loans are available from banks, building societies, supermarkets and other finance companies so make sure you compare rates. Go to our Compare & Buy to find the best loan for you.
• Keep an eye on your credit history. Loan providers will offer their best rates to people with a good track record of handling credit so check your credit report.
• Don’t buy payment protection insurance alongside the loan. If you decide you need this cover you’ll probably find it cheaper elsewhere instead of buying it from your loan provider.
• Consider a secured loan if you have equity in your home. However, bear in mind that missed repayments could put your home at risk from repossession.
• Speak to your bank. Some banks offer cheaper loan rates to current account customers.
• Consider whether a personal loan is the best option. In some cases a low–rate credit card might be better or if you’re buying a car you might find a better finance deal from a car dealership