Most people are well aware that the financial sector has been deeply affected over the past year as a result of the global credit crunch, which has affected all sectors of the financial industry and has seen credit conditions become far tighter and borrowing rates become far more expensive.

However, over the past year the base interest rate has fallen a number of times, and in particular over the past two months, which has seen 2 percent sliced from the base rate. The base interest rate is now at 3 percent, which is almost half what it was a year ago, at 5.75 percent.

However, whilst most would think that this was good news for borrowers recent research has shown that the interest rates on personal loans has actually be creeping up since September, and the average rate is now double that of the current base rate. The research shows that before September the gap between personal loan rates and the base rate was under 3 percent, but consumers can now expect to have to cover a gap of more than 5 percent between loan rates and the base rate.

The research was carried out by Moneysupermarket.com, and an official from the financial website stated: “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 added: “Whilst personal loans are often seen as the ‘poor man’ of everyday financial products, there is always a spike of activity post-Christmas and into the New Year when consumers take their finances in hand, and turn over that new leaf. Invariably this involves consolidation of store cards, credit cards and overdrafts. However, loans are not the cheap form of borrowing they once were. In the last two weeks, we’ve seen three of the top loan providers – Tesco, Asda and Yourpersonalloan increased their rates by as much as 0.3 per cent, despite base rate dropping by 1.5 per cent.”

He went on to state: “The Competition Commission’s recommendations on the sale of PPI last week will undoubtedly result in loan rates soaring next year, perhaps up to around ten per cent, which means they won’t be that much more competitive than credit cards. However, it’s likely we could see one or two downward rate movements after Christmas as providers seek to attract those with New Year’s resolutions of the financial kind, but borrowers need to keep a close eye out for the best deals and ensure they only apply for products they’re likely to be accepted for. This is where our SmartSearch tool will help – enter a few basic details and we’ll point you towards loans you are likely to be eligible for with your credit history. With lending criteria becoming more and more stringent, it’s important to keep your credit record as clean as possible and not taint it with failed applications for loans.”

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