Warning over ‘double whammy’ rises to personal loans as rates increase by 65%

HOUSEHOLDS are being warned to ensure they can afford to keep up with personal loan payments 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.

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.

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 in 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.

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.”

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.

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 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.

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.