Cost of loans rises as credit crunch bites

The cost of taking out a personal loan is set to rise significantly, with nine lenders this week raising interest rates by up to 4 percentage points.

Personal finance analysts warned yesterday that a price war in the loans market was over, with the global credit crunch reducing the extent to which lenders can compete on price.

Moneyfacts said that while rates below 6 per cent a year were available as recently as four months ago, it is now increasingly difficult to find a loan costing less than 7 per cent. Deals that would previously have looked expensive, such as Direct Line's rate of 8.4 per cent for a three-year loan of £5,000, are now making it into best buy tables.

Lisa Taylor, a spokeswoman for Moneyfacts, warned: "With increasing uncertainty in the financial markets, rising levels of bad debt and a year of interest rate rises putting pressure on our disposable incomes, lenders are increasing their margins in what has become a far more risky environment to do business."

Rate rises for new borrowers introduced this week include Bradford & Bingley's decision to raise the cost of its unsecured lending from 13.9 per cent to 17.9 per cent. The Cheshire and Derbyshire building societies have increased their rates by up to 3 percentage points.

In recent weeks, Eskimo Loans, Goldfish, Norwich Union and RAC Financial Services have all edged their rates up by up to 1 percentage point, while Norwich & Peterborough Building Society and Northern Rock have raised rates up by 0.7 points and 0.5 points respectively.

In addition to credit market problems, lenders have also been hit by the growing regulatory focus on payment protection insurance, which some loan providers have been using to increase the profitability of their best deals. Last week, the Financial Services Authority said lenders were continuing to mis-sell PPI, which protects borrowers in the event they lose their jobs or fall ill.