The cost of taking out a personal loan is set to rise
significantly, with nine lenders this week raising interest rates
by up to 4 percentage points.
Personal finance analysts warned yesterday that a price war in
the loans market was over, with the global credit crunch reducing
the extent to which lenders can compete on price.
Moneyfacts said that while rates below 6 per cent a year were
available as recently as four months ago, it is now increasingly
difficult to find a loan costing less than 7 per cent. Deals that
would previously have looked expensive, such as Direct Line's rate
of 8.4 per cent for a three-year loan of £5,000, are now making it
into best buy tables.
Lisa Taylor, a spokeswoman for Moneyfacts, warned: "With
increasing uncertainty in the financial markets, rising levels of
bad debt and a year of interest rate rises putting pressure on our
disposable incomes, lenders are increasing their margins in what
has become a far more risky environment to do business."
Rate rises for new borrowers introduced this week include
Bradford & Bingley's decision to raise the cost of its
unsecured lending from 13.9 per cent to 17.9 per cent. The Cheshire
and Derbyshire building societies have increased their rates by up
to 3 percentage points.
In recent weeks, Eskimo Loans, Goldfish, Norwich Union and RAC
Financial Services have all edged their rates up by up to 1
percentage point, while Norwich & Peterborough Building Society
and Northern Rock have raised rates up by 0.7 points and 0.5 points
respectively.
In addition to credit market problems, lenders have also been
hit by the growing regulatory focus on payment protection
insurance, which some loan providers have been using to increase
the profitability of their best deals. Last week, the Financial
Services Authority said lenders were continuing to mis-sell PPI,
which protects borrowers in the event they lose their jobs or fall
ill.
Costs of funds have been increasing. Financial institutions are
not keen to lend. I see the Feds are going into the markets to buy
the commercial papers of companies, just to get the money to them
since the commercial lenders are afraid.
Are any of our financial institutions facing credit crunch? If
yes, then the businesses borrowing from these institutions should
be concerned.
In the past, businesses were well pampered when financial
institutions were eager to provide easy loans. Now, some businesses
seek to develop new relationships with institutions that can
provide them the continuity in funding.