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Loan rates rise despite Base Rate remaining low

28 October 2009 / by Andy Davies

Lenders have continued to increase loan rates, according to Moneyfacts, despite the fact that the Base Rate has remained at a historic low of 0.5 per cent for the past six months.

While the average interest rate for a £1,000 loan has remained at 19.7 per cent since March this year, the cost of larger borrowing has increased.

For instance, the average rate of interest for a £5,000 loan has risen by 0.2 per cent to 12.4 per cent, while borrowers looking for a £10,000 loan can now expect to pay around 9.9 per cent in interest, compared to 9.4 per cent in March.

According to Moneyfacts, Norwich & Peterborough Building Society has enforced one of the biggest increases – upping rates by 1.7 per cent for loans between £10,000 and £25,000.

In contrast, Abbey loan rates have increased by 0.1 per cent to 0.6 per cent for those looking to borrow between £1,000 and £3,000.

Commenting, Michelle Slade, spokesperson at Moneyfacts.co.uk, said: "Lenders have continued to tighten up their lending criteria, with only customers with blemish free credit records likely to be accepted for a personal loan. Those customers that are accepted are having to a pay an increasingly higher price."

As the average interest rate for a £25,000 loan has risen to 10 per cent in the last six months – an increase of 0.5 per cent – Ms Slade says this has meant £335 being added to the average cost of a £25,000 personal loan.

Ms Slade attributes these increases in rates to rising unemployment, suggesting that "lenders are worried that an increased proportion of their customers will default on their loan".  

"It is highly likely that new customers are paying an increased premium to cover the defaulting customers who took out loans at the previously more competitive rates," she said.

She warned potential borrowers that this "upward trend in rates looks set to continue".

"Anyone in need of a personal loan really needs to ensure they do their homework to find the best deal possible or they will be left severely out of pocket," she added.

© Fair Investment Company Ltd

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