The interest rates on consumer loans have reached their highest level in over five years, amid soaring inflation and Bank of England rate hikes.
An analysis of Bank of England data from broker Freedom Finance has revealed that the average interest rate for a £10,000 personal loan was 4.06 per cent in May, the highest level since September 2016 (4.11 per cent).
Furthermore, £5,000 personal loans rose to an average quoted rate of 8.35 per cent, the highest level since March 2017 (9.54 per cent).
Freedom Finance said despite the recent rise in personal loan rates, they still represent one of the cheapest forms of borrowing for many consumers so demand for them is expected to increase through the year. The broker noted that consumer credit borrowing has surpassed the pre-pandemic average over the past three consecutive months.
The central bank base rate now sits at one per cent after consecutive rate hikes, while the current inflation rate is nine per cent – far above the Bank’s two per cent target.
David Hendry, chief marketing officer at Freedom Finance, said the data shows the economic environment has been impacting the cost of consumer credit borrowing.
Read more: BoE: Consumer borrowing soared in April
“The Bank of England is raising interest rates to try and limit inflationary pressures, but the cost of borrowing is also growing,” he said. “It is a further blow for consumers who are starting to see noticeable increases in mortgage and other consumer credit rates.
“Personal loans are now at their highest level in over five years while overdraft rates continue to reach new records. For people with existing debt or struggling to make ends meet, it is vital that they are thinking about how they reduce their repayments on existing credit by finding the best possible rates available to them.”