Borrowers should be careful when applying for credit to make sure they are getting the best deal as loan rates have risen to an all-time high, according to research from moneysupermarket.com.
With the average loan
rate at 8.46 per cent and the Bank of England base rate now at three per cent after a 1.5 per cent reduction this month, the gap between the average cost of a loan and the base rate has almost doubled in just two months, the comparison website's study found.
Borrowers are now paying more than five per cent above the base rate for the privilege of taking out a loan, compared with two months ago when the gap was less, at just 2.92 per cent.
Tom Moss, head of loans at moneysupermarket.com, explains that this is largely because loan rates are overlooked in the aftermath of a base rate cut when the focus is usually on other areas such as mortgage rates
and savings accounts
"Whilst personal loans
are often seen as the ‘poor man' of everyday financial products, there is always a spike of activity post-Christmas and into the New Year when consumers take their finances in hand, and turn over that new leaf. Invariably this involves consolidation of store cards, credit cards and overdrafts." Mr Moss said.
But, he continued, loans do not offer the same avenue to cheap credit that they once did, and some loan providers have even increased their rates since the base rate cut.
Mr Moss also expects the Competition Commission's recent recommendations on the sale of payment protection insurance
to push up the cost of loans even more as lenders try to scrape back some of the profits they were making from PPI sales.
Loan rates could rise to around 10 per cent in 2009, he predicts, which means they will not be much more competitive than a credit card, but savvy consumers could get a competitive deal in the New Year when lenders are trying to attract borrowers with aspirations of financial New Year's resolutions.
But to get the best deals, which might be few and far between, Mr Moss urges consumers to keep their eyes peeled and compare loans
, and to only apply for the ones they are likely to be accepted for so as not to damage their credit report with failed applications.
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