Credit crunch bites as lenders push interest rates towards 10%

As the credit crunch hits home, the average interest rate on an unsecured loan of £5,000 has risen to nearly 9.5 per cent, according to the price-comparison website MoneyExpert.com.

Lenders are raising interest rates to cover their risk, and firms such as LV, GE Money and Leeds building society have pulled out of the unsecured loans market entirely.

Sean Gardner, MoneyExpert's chief executive, said: "Borrowers are feeling the pinch, with those wanting to borrow less getting squeezed the most. There are still good deals out there but lenders are getting tough on applications and rates."

Lenders offering the best interest rates at £5,000 include the AA, Bradford & Bingley, Barclays and MoneyBack. The highest rates are charged by Ulster Bank and by the Yorkshire and Saffron building societies.

People looking to take on slightly more debt will do better, says Mr Gardner: "Lenders take the view that those borrowing more are in general a better risk than those borrowing less, and offer better rates as a consequence."

The average rate on a loan of £7,500 is 7.97 per cent, with some providers charging below 7 per cent. The supermarkets offer the cheapest deals: Sainsbury's Bank and Tesco Personal Finance charge 6.5 and 6.4 per cent respectively.