The cost of personal loans has reached a nine-year high, as lenders stretch profit margins on unsecured loans lending. The average rate on a £5,000 loan over three years is now 12.4 per cent, up from 10.8 per cent two years ago and compared with the current base rate of 0.5 per cent. The best rate on the market is 8.9 per cent, according to Moneyfacts - the highest since January 2001, when the base rate was 6 per cent.

In January 2007, before the credit crunch, personal loans were available at rates of 5.8 per cent, just 0.55 points above base rate at the time. Michelle Slade, spokeswoman for Moneyfacts.co.uk, commented: "In such a risk-adverse market, lenders are only offering loans to the most creditworthy applicants and then at a premium. The post-Christmas loan sales that we see each January did not materialise, a further indication that lenders do not want to encourage unsecured lending."

Lenders have hiked loan rates in response to a rise in unemployment that has increased the risk of borrowers missing repayments. Slade added: "Unemployment remains high and when people are struggling, unsecured lending is one of the first debts they stop repaying."The best rate is currently offered by Alliance & Leicester, at 8.9 per cent. But few applicants are able to secure a competitive loan rate as lenders cherrypick the lowest-risk borrowers, according to Slade, with three-quarters of lenders serving only existing customers. "The majority of lenders advertise typical rates, so borrowers shouldn't be surprised if they have to pay a higher personal loan rate than that shown," she said.

Mortgage approvals are running at more than twice last year's levels, according to the Bank, but again this bounce-back may overstate matters. Last November marked the absolute nadir of new home loans, and lending, at a 21-month high of 60,158 approvals, is still about a third off pre-credit crunch levels. Official sources have stressed in recent weeks that the financial sector is far from being able to stand on its own feet. More worryingly perhaps, the figures again confirmed that Britons are making strenuous efforts to rid themselves of the debts they accumulated during the boom. Net consumer credit fell by a further £376m in November, the fifth successive monthly net repayment. Consumers paid back a total of almost £2bn between July and November.

"However, borrowers need to be wary of making multiple applications as this will reduce their chances of being accepted." Andrew Hagger, head of communications at price comparison website Moneynet, claimed lenders were using personal loans to recoup revenue lost when restrictions were placed on the sale of payment protection insurance last year. "Not only is the risk of defaults higher in the current economic climate, the highly profitable payment protection insurance cash cow is no longer there to subsidise lower loan rates," said Hagger.

"With banks and building societies still adopting a far more cautious stance even when it comes to mortgage lending, even with your property as collateral, it's no surprise that the appetite for unsecured lending has pretty much dried up." The figures were published as the Bank of England revealed that the amount borrowed in December through loans, credit cards and overdrafts rose by £52 million to £226.4 billion, the first month-on-month increase since June last year.

Source: business.scotsman.com