Loan Rates Will Go Even Higher

Loan rates seem set to go even higher as several UK loan providers have fallen victim to the global credit crunch in recent days. In unprecedented activity, five UK loan providers indicated their intention to pull out of the UK market as credit has all but dried up in the credit crunch that followed the sub-prime crisis in the US in the summer.

Credit is so hard to find that is has driven up interest rates by almost 4% in recent weeks, and this trend looks set to continue well into next year.

Liverpool Victoria is no longer providing unsecured personal loans, and this follows an announcement from GE Money that it is withdrawing its enticing rate of 6.9% on loans of £7,500 to £25,000. At the end of last week Leeds Building Society withdrew its loans.

In the unsecured loans market SPPL and LoanOne have pulled their ranges, and Money Partners are about to do the same.

Bob Sturges of Money Partners believed that other loan providers were likely to join the exodus, and further rate rises were certain to come. "This decision was against our wishes. The credit crunch hit us a double whammy; it became harder to find funds, which meant we had to raise rates, which meant people were less interested in borrowing. And it didn't get any better as time went on - we simply weren't able to secure new lines of funding. We have nowhere to go; we're disappointed and frustrated."

Lisa Taylor of Moneyfacts.co.uk, the price comparison website, commented that it was highly unusual to get so many withdrawals from the market, adding that the loss of such a range of loan providers with varying competitiveness showed how wide the credit crunch's impact had become. "Providers may consolidate their loan offerings or charge higher rates from time to time, but for someone to pull out of the market entirely is shocking and unusual. The fact that there have been three in one week is very worrying indeed."

Financial uncertainty continues to stalk the market, with a host of loan providers raising their interest rates in the past couple of week. In fact, nine providers have put up rates recently. Bradford & Bingley made the highest increase: the rate on loans of £2,000 to £3,000 went up 4% to 17.9%, and for loans of £5,000 to £7,500 the increase was 3.2%, taking the rate to 9.9%.

A month ago Northern Rock - the bank that so far has taken the biggest hit of all financial institutions in the UK - raised its unsecured loan rates, as it struggled to cope with the effects of the credit crisis. It lost its place at the top of the loan tables as a result.

Tim Moss, head of loans at moneysupermarkets.com, said: "Everyone is moving their rates up. The personal loans market hasn't seen anything like this for almost a year and suddenly things have changed considerably. Lenders finally realised they had to make some margins in the business. They spent quite some time lending out to risky borrowers and now they have to change to make up for those lending decisions made years ago."

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Published on November 13, 2007