The personal loan market has seen some of the sharpest increases in the cost of lending since the credit crisis struck, with rates currently at a nine year high despite the base rate remaining at a record low.
According to market analysis from financial information website Moneyfacts.co.uk, personal unsecured loan rates have not been this high for almost a decade.
Because risk continues to dominate lenders' decision-making processes, unsecured personal loan rates have not gone the way of the base rate, which plummeted to 0.5 per cent in March 2009, where it has remained since.
With no guarantees that the loan will be repaid, unlike secured loans, lenders have been hiking their rates to cover the risk.
The last time loan rates were higher than they are now was in 2001, when the base rate was at its decade high of six per cent.
Michelle Slade, spokesperson for Moneyfacts.co.uk explained: "Unlike on a mortgage, there is no security that a personal loan debt will be repaid. In such a risk adverse market, lenders are only offering loans to the most creditworthy applicants and then at a premium."
Ms Slade said that Moneyfacts was expecting a fall in loan rates in the new year as lenders looked to compete for post-Christmas business, but that this never materialised. She believes that this indicates a continuing lack of willing amid lenders to take the risk on unsecured lending.
Ms Slade said that unemployment is further discouraging lenders, as unsecured debts are often the first expense that people start missing.
"The majority of lenders advertise typical rates, so borrowers shouldn't be surprised if they have to pay a higher personal loan rate than that shown," she said, and urges consumers to compare loans to find the best one for their needs.
Commenting on the research, Andrew Hagger of Moneynet.co.uk agreed that unemployment is playing a part in pushing up loan rates, and added that there is less incentive to lend since loan providers were banned from selling profitable payment protection insurance at the time of sale.
"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," he said.
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