Cost of loans up despite rate fall
Updated on 28 November 2008
The gap between the average cost of a personal loan and official interest rates has nearly doubled during the past two months, research has shown.
Consumers looking to take out an unsecured loan can expect to pay around 8.46%, up from an average rate of 7.92% in September, despite the Bank of England base rate falling from 5% to 3% during the same period.
The new average loan rate is now 5.46% higher than the base rate, compared with being only 2.92% higher in September, according to financial website moneysupermarket.com.
Three major loan providers have increased their rates by up to 0.3% during the past fortnight despite the recent 1.5% interest rate cut.
The group said the average personal loan rate was now at its highest level since its records began in March 2003.
Tim Moss, head of loans at moneysupermarket.com, said: "Loan costs are often overlooked in the frenzy of a base rate cut, when the focus is on the impact of any rate movement on mortgage payments and savings rates.
"What our calculations clearly show is that the cost of a personal loan is as apparently uncorrelated to base rate as mortgage rates are.
"The key difference though is that mortgages are priced according to Libor rather than base rate - loan rates are not."
He warned that average loan rates could increase to around 10% next year as a result of the Competition Commission's recent recommendations on the sale of controversial payment protection insurance.
The commission called for a ban on the sale of the cover alongside credit agreements, instead saying firms would have to wait for 14 days before they were allowed to contact customers and sell it.
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