Personal loan rates shoot up 17%

The average interest rate paid by consumers wanting to borrow £5,000 via a personal loan has soared by 17% over the last two years.

New research from Sainsbury's Finance shows that the typical rate paid has jumped from 10.67% in September 2008 to 12.45% this month.

Sainsbury's has published the research to coincide with a reduction in its personal loan rates.

The supermarket bank is now offering customers a market-leading rate of just 8.7%, which is 3.75 percentage points below the current average loan rate, as a result.

It is not the only lender offering borrowers with good credit scores access to £5,000 loans at below 9%, though.

A borrower with a good credit score could potentially pay as little as 8.3% for a £5,000 loan through lending exchange Zopa, for example, while Alliance & Leicester, Tesco and Santander also have typical rates of 8.7% on this amount.

That said, the number of banks and other loan providers offering personal loans for this amount at sub-9% has fallen dramatically over the last two years.

In September 2008, according to the figures from Sainsbury's, 11 lenders were marketing £5,000 personal loans with interest rates of less than 9%.

But last month, there were just six loan companies offering rates of below 9% on that amount.

The number of £5,000 loans available at between 9% and 9.9% has also plunged, from five in September 2008 to just one last month.

Steven Baillie, head of loans at Sainsbury's Finance, said: "The past two years have seen a big increase in published interest rates for £5,000 loans.

"Our analysis highlights the importance of shopping around for personal loans."

When looking for a personal loan, it is important to remember that the rate you are likely to pay will depend very much on your credit rating.

The 8.7% rate marketed by Sainsbury's Finance is only on offer to borrowers with excellent credit scores, and the same is true of the other best buy deals.

For a borrower with a poor credit score, the interest rate on a loan of say £10,000 is likely to be closer to 20% if he or she is a homeowner and could be more than 100% if not.

And even someone with a fair to middling credit score is likely to have to pay over 10%.

Borrowing a larger amount is one way to bring the interest rate you pay down.

When looking at loans between £7,500 and £14,999, for example, the headline Sainsbury's Finance rate is 7.7%, while Alliance & Leicester and Santander are offering a typical rate of 7.6%.

However, it is not worth borrowing more than you need for this reason as a larger loan will take you longer to pay back – meaning you pay interest over a longer period of time.

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