Personal loan rates up 1.7%

Personal loans rates have risen by an average of 1.7 per cent on the last year, as the credit crunch blighting mortgages spreads.

Research by Moneyfacts shows the average loan of £5,000 over three years now costs £386 more over the term that a year ago.

So far this year, 27 personal loan products have been changed.

"Unsurprisingly the personal loan market has not escaped the effects of the credit crunch," said Samantha Owens, head of personal finance at Moneyfacts.

"In the majority of cases, [product changes] have been increases across the board, with lenders combining large one-off rate increases with gradual small rises the overall effect does not favour consumers looking for extra borrowing."

Furthermore 12 lenders – including Norwich Union, Virgin Money, Goldfish and GE Money – have dropped out of the personal loan market altogether.

"Lenders also seem to be clamping down on those who borrow more," Ms Owens added.

"Traditionally the more you borrow on a personal loan the lower the APR. More recently however, we have seen lenders increasing the rate offered on the higher loans. In some cases, the rate on the higher tier has actually gone above that of the tier below.

"This change is another way lenders are tightening up, ensuring that we only borrow as much as we need, not a penny more."

Further changes in the personal loan market include lenders being more picky about to whom they lend and introducing personal pricing – so your loan rate is matched to your risk and circumstances.

However, Ms Owens claimed this was not necessarily bad news for the borrower.

"Whereas before a prospective borrower was either accepted or declined, now those lenders that offer an APR dependent on a credit rating will offer an alternative rate to those borrowers who otherwise could have been declined.

"But what it does mean is that it is increasingly difficult to work out what the best deal is."

Currently four of the top six best buys in the loan market listed by Moneyfacts fix rates depending on the borrower's credit rating. However, the advertised rate must apply for two-thirds of applicants.