Exclusive
DON'T BANK ON IT
Warning over ‘double whammy’ rises to personal loans as rates increase by 65%
We explain how rate hikes are making loans more expensive
HOUSEHOLDS taking out personal loans are being urged to check they can afford the repayments - as the cost of borrowing has soared over the past decade.
Lenders have hugely increased the amount of money customers can borrow as a personal loan over the past few years.
2
In May, Nationwide joined several other lenders in upping the maximum amount if will offer from £25,000 to £50,000, which it said reflected a rise in home renovation costs.
But as max loan sizes have risen, lenders have also increased the interest they are charging on these loans - and at the same time, the number of customers struggling to keep up with their payments has also risen.
The typical interest charged on a £50,000 personal loan paid back over five years have risen by 4.2 percentage points, from 6.4% in 2014 to 10.6% in 2024, figures from Moneyfactscompare.co.uk provided to The Sun show.
This is equivalent to a 65% increase over the last decade.
Read more in money
Meanwhile, data from The Bank of England shows that in the final quarter of 2023, over a quarter (25.7%) of lenders saw default rates on unsecured loans rise over the period.
And a more recent survey of lenders by the Bank found this trend has increased this year and is expected to continue over the coming months.
A personal loan is a type of "unsecured loan". This mean you can borrow the cash without having to offer up any assets as collateral that the bank can claim on if you miss payments.
Many borrowers use personal loans to pay for significant costs up front, such as house renovations, and they are considered a relatively safe way to borrow.
Most read in Money
But these new figures show these loans are becoming increasingly expensive, and consumers are struggling to manage them.
Laura Suter, director of personal finance at broker AJ Bell, said: “If you’re applying for a new loan, you might be surprised at how much you can borrow.
"Even if you only apply for a smaller sum, the lender may highlight that you could borrow more. But just because you can borrow more, doesn’t mean you should.
"You need to think about how you’ll repay the debt and how much the monthly repayments will be.
“It’s very easy to accept more borrowing, spend it and then realise that you can’t afford the monthly repayments. Once interest is added on, this can leave you in a debt spiral."
THINK BEFORE YOU BORROW
BORROWING sounds like a simple way to help pay bills – but beware falling into debt you cannot pay back.
It’s always vital to ask yourself if you actually need to borrow before committing to a new credit card, personal loan or overdraft.
If you cannot afford to pay off debt you already have, you should avoid at all costs taking on any more.
How much more expensive is borrowing now?
If someone borrowed £50,000 as a personal loan over a five year period at the average 6.4% APR back in 2014, their repayments would have cost £971.75 a month.
It means after five years, they would have repaid £58,305.23 in total - £8,305.23 of which would be interest.
However, if the same person was to borrow £5,000 over five years at this year's average rate of 10.6% APR, their monthly repayments would cost £1,065.24 - £93.49 a month more than a decade ago.
And after five years, they'd have repaid £63,914.57 in total, including £13,914.57 in interest - £5,609.34 more than if they took the loan out in 2014.
Remember that the rate you get will depend on your credit history.
Those with a higher credit score may get more preferential rates, while those with poorer scores will face higher interest rates.
"If you have a poorer rating, you might only be able to access loans at much higher rates of interest - possibly upwards of 29.9% APR," explained James Daley, managing director of Fairer Finance.
At 29.9% APR, someone borrowing £50,000 would pay a whopping £28,036.80 in interest.
APR – or Annual Percentage Rate - refers to the total cost of your borrowing for a year.
2
Why are lenders increasing maximum loan sizes?
As of this month, nine of the country's biggest lenders accept applications for personal loans worth up to £50,000, while a further eight lenders offer personal loans of up to £40,000.
Lenders have attributed these higher loan sizes to increasing construction costs, and the latest data from Checkatrade backs this up.
The average homeowner willing to embark on a home renovation will now spend £48,000 on average for a single small-scale extension, it said.
And experts at The Building Cost Information Service say that costs are expected to rise by another 15% over the next five years.
Ms Coles said: "The cost of home improvements has gone through the roof in the past couple of years, so people are having to borrow much larger sums for the jobs they need to complete.
"This makes financial sense if you know that the work will add more value than the total of the loan and the interest."
However, while this added flexibility is great for those looking to borrow to help fund a home renovation, rising interest rates mean you'll pay more to borrow these larger sums.
What are the alternatives to personal loans?
Despite the rising costs, personal loans are one of the quickest and safest options when it comes to borrowing large amounts of money, such as for home renovations.
Mr Douglas explained: "Most personal loan applications can be completed online and will be paid out in a matter of hours."
Not having your property tied up to the agreement is also an added perk.
However, homeowners might be able to pay slightly less interest through additional borrowing on their mortgage.
Ms Coles said: "You would typically get a lower rate on a mortgage if you needed to borrow more money."
For example, borrowing £50,000 through a personal loan over five years at 10.6% will cost £63,914.57.
But if you added £50,000 to a mortgage, assuming it is repaid in five years, with typical fees of £1,000 and a rate of 5.5%, you'd repay £58,448 on this bit of the mortgage.
That makes the mortgage option around £5,466.57 cheaper.
However, how much you can get will depend on how much is already borrowed against your home.
You also need to take into account how long you'd have to spread these repayments if you took the remortgaging route.
Ms Coles explained: "Spreading the repayments over a longer period would mean lower monthly repayments, but would also mean the cost would stack up over the longer term."
For example, if you repaid an additional £50,000 over 15 years instead of five years at 5.5%, the total repayment for this portion would rise to £75,00.
At these rates, and if the mortgage is for any longer than seven years, the mortgage would cost more than the personal loan.
Experts have added that borrowers should also steer clear of secured loans.
Ms Coles said: "I would be incredibly wary about secured loans. They are more expensive than a mortgage, and yet come with the same risk to your home as a mortgage.
"They are also structured to be repaid over the longer term, so you end up paying more in interest."
What happens if I can't keep up with my personal loan?
If you do struggle to pay off your personal loan, the consequences depend on how many payments you miss.
"If it’s an unsecured loan, and you only miss one payment, you’ll be charged a fee and it will be noted on your credit record, but that should be the end of it as long as you make the payment up quickly," Ms Coles explained.
"The more payments you miss, the more serious the consequences will get.
"Once they start to add up, it’ll affect your credit record more seriously.
She added that your lender may then continue to add more fees before passing your debt onto a debt collector.
READ MORE SUN STORIES
They could then file a County Court Judgement against you, which could make any further borrowing very difficult for at least six years.
"Before you consider taking out a personal loan, you need to be certain you can afford the repayments," she said.
How to get free debt help
There are several groups which can help you with your problem debts for free.
- Citizens Advice - 0800 144 8848 (England) / 0800 702 2020 (Wales)
- StepChange - 0800138 1111
- National Debtline - 0808 808 4000
- Debt Advice Foundation - 0800 043 4050
You can also find information about Debt Management Plans (DMP) and Individual Voluntary Agreements (IVA) by visiting MoneyHelper.org.uk or Gov.UK.
Speak to one of these organisations - don't be tempted to use a claims management firm.
They say they can write off lots of your debt in return for a large upfront fee.
But there are other options where you don't need to pay.
Do you have a money problem that needs sorting? Get in touch by emailing [email protected].
Plus, you can join our Facebook group to share your tips and stories
Topics