Cheap loans won't last, so cut your debts

You could forgive the personal loan industry for stealing Harold Macmillan's claim: "You've never had it so good."

Interest rates may have risen by 0.75 points since January, yet the cost of loans has barely changed. In many cases, fixed rates have edged down.

The Bank of England base rate stood at 3.75 per cent in January, when one of the best £9,000 personal loan deals on the market, according to financial information website moneysupermarket.com, was with Northern Rock building society at an annual percentage rate (APR) of 6. Rival lender Sainsbury's Bank offered an APR of 6.5.

Fast forward to today: the base rate is at 4.5 per cent and, for the same amount, Northern Rock has pegged its APR down slightly to 5.9. Over at Sainsbury's, rates have fallen by 0.4 percentage points to 6.1.

Only three weeks ago, Goldfish, the lender owned by Lloyds TSB, nudged down the APR of loans taken out online from 6.1 per cent to 5.9 per cent.

What's going on?

With deals like these, the banks' profit margins must be pretty thin, says Richard Mason of moneysupermarket.com. "There is intense competition in the market," he adds. "I think the driving force is the hope that they can then cross-sell [other products to customers]."

But it isn't all good news for borrowers. "This situation cannot be sustained," continues Mr Mason. "With more rate rises expected, monthly outgoings will only get worse, so people should spend a few moments assessing what they are paying out and to whom."

If you are struggling with a number of store card, credit card and other debts, consolidation into one, more manageable monthly payment with an unsecured personal loan could be an answer.

For example, if you're paying off a credit card at an APR of 14.9 and have an overdraft at an annual rate of 12 per cent, you should be able to make a dent in your overall debt by taking out one loan with an APR of 6.7.

Remember, though, that once you've consolidated, it's vital to keep a lid on your spending to avoid adding to your debts.

Always check the small print with any personal loan, and watch out for headline APRs that are often only a typical rate; you could end up saddled with a higher one.

Check, too, for penalties if you repay your loan early, and take out loan payment protection only if you really don't think you could cope with the commitment if you fell ill.