Personal loan rates leap 4pc in credit crunch

Banks are raising interest rates on personal loans by up to 4 per cent as the credit crunch continues to hit consumers.

Nine major lenders have put up charges on new loans in the past week, according to financial information group Moneyfacts.

Bradford & Bingley has increased the rate it charges on loans of between £2,000 and £2,950 by 4 percentage points to a punishing 17.9 per cent. That is more than three times the Bank of England base rate of 5.75 per cent.

The move reflects the fact that the cost of borrowing money on international money markets has risen in recent weeks.

It would however, also appear that a number of banks are looking to increase their profit margins on loans as they take a more cautious approach to lending.

A similar pattern is being seen with home loans, where some rates are rising and banks have introduced tighter restrictions on the amounts they will lend and to whom. The global credit crunch was triggered by the failure of thousands of risky or subprime mortgages in the U.S.

A raft of banks are nursing massive losses and are extremely reluctant to lend to one another. This lack of ready money has driven up the interest rates banks charge each other for loans.

This is now being passed on to consumers. Bradford & Bingley has also raised rates on loans of between £5,000 and £7,450 – up by 3.2 per cent to 9.9 per cent.

Moneyfacts said an increase of 3.2 per cent on the rate of a £5,000 loan paid back over three years would cost consumers £290 in extra interest over the course of the loan.

The Cheshire and Derbyshire Building Societies both raised rates for between £5,000 and £7,450 by 3 percentage points to 9.9 per cent, while other lenders increased rates by up to 1 per cent.

Crisis-hit Northern Rock added 0.5 per cent to interest charged on its personal loans, pushing the rate for all amounts borrowed up to 7.9 per cent. 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.'

The rate rises will inevitably turn the screw on hard-pressed families. That will increase the pressure on retailers who fear consumer spending will collapse.

The British Retail Consortium has called on the Bank of England's Monetary Policy Committee to cut the base rate when it makes an announcement at lunchtime today.