Thrifty Loans

It is not just mortgages that are seeing interest rates rise. Banks are also raising rates on personal loans by as much as 4% as the impact of the credit crunch continues to widen.

Among nine lenders to increase charges in the last week are Bradford & Bingley which has increased the rate on its loans in the £2,000 to £2,950 category by 4%, up to 17.9%. The Bank of England base rate is at 5.75%.

The banks have made the moves as borrowing costs have increased recently on international money markets. It also appears that some banks are looking to increase their profit margins, which they cut to thin levels when the market was ultra-competitive.

Following the US sub-prime crisis, the credit crunch has taken a firm hold in the UK. The biggest and most public of victims has been Northern Rock, still struggling to find a bidder. However, as banks put loan rates up and mortgage rates continue to rise, it is the consumers in the UK who will ultimately suffer.

Bradford & Bingley’s interest rate on loans between £5,000 and £7,450 went up from 6.7% to 9.9%. On a £5,000 loan the cost to the borrower would be an extra £290 over a loan period of three years.

Northern Rock has added 0.5% to its personal loan rates, taking the rate to 7% for all loan amounts.

Moneyfacts analyst Lisa Taylor said: “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, it comes as no surprise to see lenders increasing their lending margins in what has become a far more risky environment to do business.”

Households will feel the pinch from all aides as the squeeze continues. Beyond that, retailers are likely to have a hard Christmas as consumers rein in their spending. Meanwhile, the Bank of England held the base rate at 5.75% in October.