The Bank of England base rate is at a record low of 0.5%, but anyone hoping to get a cheap loan will be in for a shock.
A glance at the Moneyfacts.co.uk best-buy tables shows that the lowest rate available on a £5,000 loan over three years is a staggering 7.9% from Sainsbury’s Finance. Marks & Spencer Money even makes the top six with a rate of 12.9%.
It emerged last week that the number of lenders offering personal loans had fallen sharply in the past two years.
According to research from Moneyfacts, there has been a 37% drop in the number of providers offering unsecured loans since July 2007.
Britannia Building Society, Direct Line, Intelligent Finance, Liverpool Victoria, Lombard Direct, MBNA Europe Bank, Mint, Northern Rock and Virgin Money are among those to withdraw from the market.
Those lenders which have continued to offer the product have increased the cost to borrowers, with the average rate on a £5,000 loan rising by 3.7% during the period, according to the figures.
Average interest of 8.7% was charged on a £5,000 loan in July 2007, but that has increased to 12.4% now.
Louis Kaszczak, head of Moneyfacts.co.uk, said: “Many lenders are pulling away from unsecured lending as the risk of customers defaulting continues to increase.
“Latest figures show that unemployment has risen once again. Borrowers struggling with repayments will inevitably forgo repayments on unsecured lending first, while trying to maintain their secured lending commitments such as their mortgage. Those lenders that do remain are charging a much higher rate of interest . . . to offset the potential risk.”
Gordon Wilson, managing director of Scottish financial adviser Thomson Shepherd, said: “It may be cheaper to take a further advance on your property and increase your mortgage rather that take a personal loan, but this will be dependant on the amount of equity on your property and when you plan to repay it.
“The rate may be lower, but if interest is paid on the debt over a longer term it may cost you significantly more in the long run.
“Furthermore, if you can’t repay your mortgage you put your home at risk.
“An overdraft is typically expensive but useful for very temporary debt, while credit cards tend to be the last resort as these provide debt at incredibly expensive rates.”