Credit is Harder to Get

Borrowers wishing to take out personal loans will find that some major lenders have withdrawn some of their loan facilities.

Unsecured personal loans were withdrawn last year by GE money, Leeds Building Society and Eskimo Loans - who are funded by Northern Rock.

Moneyfacts puts the withdrawal of unsecured loans by providers at 10% last November.

Esther James, personal finance analyst at Moneyfacts said a large reduction is worrying.

“With no sign of rates slowing down it’s a rather unsettled market. The credit crunch is showing its strength in the personal loan market,” she added.

Personal loans can be taken out in a secured and unsecured form. Secured loans have equity attached normally in the form of the borrowers house. They are often taken out as mortgages. Equity insures that if there are defaults on repayments of the loan the lender can claim the house through repossession to make up the shortfall. They often have a lower interest rate because of this guarantee.

Unsecured loans do not have equity attached. They can be taken out for a number of purposes such as home improvements, or buying a new car. If a borrower defaults on this type of loan they may find that court action ensues and credit ratings are severely affected.

Interest rates are normally higher in unsecured loans because the lender has no guarantee of equity to cover their costs should the borrower fail to make repayments.

Banks, loan companies and building societies all supply personal loans and often lend up to £15,000.

Research by Uswitch, has revealed that it seems to be getting harder to borrow money. Their figures show that 38% of people who applied for credit cards were turned down in a 3-month period in 2007. Some 19% of applications for personal loans were refused and 6% of customers credit limits were reduced.

Ann Robinson, director of consumer policy at Uswitch, said: “More than half our take home pay is now eaten up by debt repayments but our ability to repay and manage this debt is clearly faltering.

“The banks are being forced to write-off vast sums and as a result they are tightening their lending belts. This means that credit will become both harder for consumers to get and more expensive.”

The more money borrowed the lower the interest rate will be but because this is usually paid over a longer period more interest is paid in the long run. Interest rates are usually from 7% up to 20% and beyond.

Moneyfacts report that interest rates on personal loans rose last year even though the Bank of England had stabilised rates at this particular time. Moneyfacts revealed that the average interest rate on a £5,000 loan paid back over three years in August was 9.11%. This had risen to 9.76% by November despite the Bank of England’s interest rates not changing. Rises were also reported for rates and fees for credit cards.

The borrower can choose how to spread the repayments and this can vary from six months to 10 years. The longer the loan is paid back the more interest is paid.