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Personal loan interest rates on the rise

Following a number of interest rate hikes enforced by the Bank of England since August last year, experts are warning that the interest rates on most personal loans could soon run into double figures, with lenders struggling to make profits on this type of unsecured lending.

The hike in unsecured loan interest rates could also results from the clamp down by financial regulatory authorities in relation to payment protection insurance (PPI) from which many lenders make the majority of their profit rather than on the actual loan itself.

In August last year the Bank of England raised interest rates from four and a half percent to four and three quarters of a percent. In November last year, another quarter of a percent was added to the interest rate, taking it to five percent. And in January of this year a further quarter of a percent was added, pushing the interest rate up to five and a quarter percent. Many experts are predicting a further rise in around March or April.

In addition to this the financial authorities are coming down hard on many lenders for the mis-selling of PPI products, which are generally sold with financial products such as unsecured loans and credit cards.

According to experts from Moneyfacts the interest rate on many personal unsecured loans could shoot up to ten percent or more by the end of the year due to a combination of further interest rate rises and the crackdown on sales of PPI.

One Moneyfacts spokesperson stated: 'With the Office of Fair Trading due to review PPI later this year, if lenders are forced to lower the cost of their PPI cover and revert to a 'pay as you go' type policy rather than a single premium, we could potentially see best buy loan interest rates reaching double figures before the end of 2007.'

She also added: 'Our research shows that on a loan of £5,000 over three years, only four providers now offer rates below 6%, with more than 40% of the market charging in excess of 8%, and 16% charge over 10%. With a difference of 14.8% APR between the most and least competitive rates, shopping around for the best deal is an absolute must.'

Tom Smith
26th February 2007


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