This time it's personal: cash advances hit by the crunch

Julian Knight looks at the alternatives as the interest rate on personal loans goes through the roof
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The Independent Online

The Bank of England says it can see light at the end of the tunnel for lending. But that will come as a big surprise to people looking to take out a personal loan. In the past few weeks, says financial analyst Moneyfacts, high-profile lenders have been raising their rates, sometimes by a whole percentage point.

"The credit crunch has made lenders more aware of the possibility of bad debts," says Samantha Owens at Moneyfacts. "This means they are looking to charge a premium. For the past few years, the loan providers were competing with low-rate credit cards; now they're more interested in increasing their margins."

The lenders raising their rates include HSBC, HBOS, Barclays, NatWest and Tesco. And last week Nationwide said it would increase the cost of most of its personal loan products by 1 per cent. This means that someone looking to borrow between £1,000 and £3,000 from Nationwide can expect to pay a whopping 17.4 per cent, higher than the rates available on many credit cards.

This upward march looks even more punishing when it is put into the context of what has been happening to the Bank of England base rates, which has fallen from 5.75 to 5 per cent since December. Even the "best buy" loans on £5,000 from Barclaycard and Alliance & Leicester, for example, currently charge over 7 per cent.

So what options do borrowers have in trying to get their hands on ready cash?

Despite the fears of a UK housing crash and the possibility of negative equity, experts say that going to your mortgage lender and asking for a further advance is a cheaper option than a personal loan. At the worst, says Peter O'Donovan at independent financial adviser BestInvest, "you will only be paying the standard variable rate. which should be below 7 per cent".

But in the new reality of the credit crunch, borrowers can't count on their application being accepted.

"Lenders will value your home and look at the size of mortgage you already have, and then they will decide if it is sensible to make a further advance," adds Mr O'Donovan. "The days when they would go up to 100 per cent of the value of the property are gone.The best people can get now is around 90 per cent."

An alternative is to take out a second mortgage with another lender, but this is expensive and adds to financial risk at a time when experts are urging people to rein in their exposure.

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