Banks massively hike rates for loans

Figures from financial research company Defaqto show that since the onset of the credit crunch, banks have steadily increased the interest rates for personal loans.

Despite the Bank of England base rate being at a historical low of 0.5%, banks and building societies have raised the cost of unsecured borrowing. The study shows the average annual percentage rate (APR) on a 5,000 loan repaid over 36 months has rocketed from 8.1% in April 2006 to 12.9% in April 2010.

It is believed the increase in rates was instigated by the banks in order to discourage unsecured borrowing as they attempt to rebuild damage to their balance sheets caused by reckless lending during the boom years. Lenders have become increasingly concerned about the likelihood of customers not keeping up to date with their monthly payments and have attempted to deter customers by making borrowing more expensive.

Figures from the British Bankers' Association show that banks and building socieities have significantly cut their exposure to personal loans. In January 2010, banks lent 29% less in the form of personal loans than they did the previous January. In the past two years they have collectively reduced the total amount of money which is being loaned from 67bn at the start of 2008 to 52.3bn in January 2010, a reduction of 15bn.

Lenders have become more discerning about whom they lend to, with the most attractive deals reserved for those with squeaky clean credit history.

A number of banks now only lend to customers who have current accounts with them, and the rates offered are tailored to the indidivual based on their credit record.

David Black, a banking analyst at Defaqto commented "There is not a great deal of appetite among the lenders to do lots of unsecured lending, and for the last few years there is a definite push towards quality not quantity. Many of the banks are focusing their unsecured lending on existing customers; so to get an unsecured loan or credit card from HSBC or RBS you now have to have a current account with that provider."

In addition, Kevin Bray, Insight Analyst for Banking at Defaqto noted "the number of providers has reduced by a third since 2007".

Several high-street lenders have announced sizeable increases in rates on personal loans since the start of 2010.

In January the Halifax bank, now in the partially state-owned Lloyds group, increased its APR on loans below 5,000 from 18.8% to 22.9%, and for loans of 5,000 to 6,999, from 12.8% to 19.9%.

In February, high-street giant HSBC raised its APR from 8.7% to 9.9%.