Loan rates on the up

One month after financial comparison site Moneyfacts warned of the imminent demise of the sub six per cent loan, there is only one such loan left on the market, says Moneyfacts analyst Michelle Slade. It seems that lenders are becoming more cautious, with growing numbers of individual voluntary arrangements, bad debts and defaults.

The Moneyfacts analysis reveals differing trends for credit cards and loans, says Ms Slade: ‘As the 0 per cent credit card market continues to flourish, with deals in excess of 12 months easily found (although lending criteria has been tightened), it is the more structured lending which seems to be bearing the brunt. Eight personal loan providers increased interest rates by around one to two full percentage points, and in one instance by seven per cent.’

There are many reasons why this may be happening, speculates the analyst. It could be that lenders are pre-empting the results of the intervention of the Competition Commission into the payment protection insurance market. If this insurance has to become more competitive, it could affect lending.

It could also be that lenders have been affected by increased level of bad debt and are pushing rates up to take advantage of potentially high demand driven by new car registrations.

Ms Slade comments: ‘There seems to be no straightforward answer to why loan rates are spiralling, it could be a combination of some or all of these factors, or simply a result of previous competition in the personal loans market driving prices to a level which was simply not sustainable.’

Rate increases have made small loans more expensive, says the analyst, with many loans of £3,000 to £5,000 being twice as expensive as a large loan from the same provider. At those rates, it could be worth using a 0 per cent credit card or low life of balance transfer deal.