Personal loan rates have continued rising despite last month’s dramatic reduction in the base rate, and could reach as high as 10% next year.
According to new research from Moneysupermarket.com, the average personal loan rate is now 8.5%, or 5.5% above the base rate. Just two months earlier, that gap was just 2.9%.
“Loans are not the cheap form of borrowing they once were,” says Moneysupermarket head of loans Tim Moss. “In the last two weeks, we've seen three of the top loan providers - Tesco, Asda and Yourpersonalloan - increase their rates by as much as 0.3%, despite base rate dropping by 1.5%.
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PPI crackdown will raise costs
The bad news is that personal loan costs are likely to go up before they come down. The Competition Commission recently announced plans to crackdown on the sale of payment protection insurance alongside a loan, and lenders are expected to hike their rates in a bid to recoup some of their lost revenue.
"The Competition Commission's recommendations last week will undoubtedly result in loan rates soaring next year, perhaps up to around 10%, which means they won't be that much more competitive than credit cards,” explains Moss.
“However, it's likely we could see one or two downward rate movements after Christmas as providers seek to attract those with New Year's resolutions of the financial kind, but borrowers need to keep a close eye out for the best deals and ensure they only apply for products they're likely to be accepted for.”
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Consider a 0% credit card
Demand for personal loans tends to spike around Christmas and New Year’s, as households look to consolidate their post festive season debt.
However, making use of a 0% credit card for new purchases or a balance transfer credit card for existing debt could work out significantly cheaper. This is especially true for smaller amounts – below £7,500 – where lenders tend to charge dramatically increased rates on personal loans.
If you do decide you want a personal loan, it’s essentially you take the time to compare providers, as the savings could be massive. Also, remember to compare the overall cost of the loan rather than simply the APRs.
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