Now it's crunch time if you need a personal loan

Now it's crunch time if you need a personal loan

The so-called credit crunch that nearly brought down Northern Rock is continuing to hit British borrowers in the pocket. During the past few weeks there has been a steady increase in the rates available for personal loans. If you are planning to take one out, say to buy a new car, it is more important than ever that you shop around.

According to financial data website moneyfacts.co.uk, no less than six loan providers hiked some, or all, of their rates between October 10 and Thursday this week, including Nationwide, NatWest and Northern Rock. Other big names that have pushed up their rates since the start of this month include Bradford & Bingley (by up to 4%), Goldfish and Norwich Union.

It partly reflects the fact that, as far as the banks are concerned, the uncertainty in the financial markets has made this a more risky environment. Banks have been extremely wary of lending to each other, so is it any surprise they are being cautious about handing over their cash to us?

If you really do need to borrow, take a good look at the options. Unsecured personal loans often mean tying yourself into paying back a large sum over a long period. It is best to keep the amount you borrow to a minimum, and the loan term as short as possible. Some people may find an authorised overdraft serves their needs better, while credit cards, if used wisely, can be one of the best methods of borrowing over a short period.

With many personal loans, there are penalties.....continued below

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for clearing the debt early. Most lenders charge borrowers penalties for repaying their loans early, typically in the form of one or two months' interest. Only a handful of major providers, such as Egg, Goldfish, Northern Rock, the Post Office, Coventry building society, Leeds building society, Liverpool Victoria and Eskimo Loans, impose no penalties on early repayers.

While some banks appear to be tightening their purse strings, Barclays is running a high-profile advertising campaign to promote the fact that it has cut its rates. It is offering loans with a typical APR of 6.8%, and says that if someone takes out a loan from Barclays and finds it cheaper elsewhere, it will pay the difference between the monthly repayments, plus an additional £1 each month "for your trouble". It is also offering people who have a fixed-rate loan with another lender £50 if they switch to Barclays.

Moneyfacts warns: "Choose the wrong loan and you could be paying more than twice the amount you need in interest."

Finally, be aware that when you apply for a loan, the lender may well try to persuade you to take out a payment protection insurance policy, which ostensibly promises to cover your monthly payments if you are off work due to unemployment or a health problem. PPI is often hugely overpriced and riddled with exclusions.

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