MILLIONS face a substantial rise in the cost of borrowing as the cost of living crisis continues to bite.
The new comes only days before the Bank of England is expected to hike the base rate for the seventh time in recent months later this week.
Financial specialists at MoneyFacts have released new data on the cost of credit cards and unsecured personal loans in their Unsecured Lending Trends Treasury Report.
The data shows that the cost of borrowing continues to rise with the cost of living.
The figures come more than a month after the Bank of England hiked the base rate to 1.75% – the biggest increase seen since 1995.
The central bank hikes the base rate to help control rampant inflation which is currently sitting at 9.9%.
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However, the cost of borrowing rises when the base rate increases.
In turn, this reduces people's disposable income, which in turn drives down demand, helping to slow any price rises.
How has the cost of personal loans increased?
Rachel Springall, finance expert at Moneyfacts, said: "In the midst of a cost of living crisis there has been a rise in the cost of borrowing for new applicants on unsecured loans, with some average rates hitting their highest levels in over six years."
Individuals hoping to borrow £3,000 over the next three years will end up paying 0.2% a year more in interest than those who took out the same loan this time last year.
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Those wishing to borrow £5,000 over three years will end up paying 0.7% more a year or £105 more than those who who took out a loan this time last year.
The average rate on the £7,500 loan tier now stands at 5.6%, up by 1.2% year-on-year, its highest point in over six years, since January 2016.
And the average annual rate of interest on the £10,000 loan tier sits at 5.5%, up by 1.1% year-on-year.
How have credit card interest rates changed?
Rachel said: "Consumers who need to borrow over the short-term will find interest rates on credit cards rose during the third quarter of 2022."
"Over the past quarter, the market witnessed a new high purchase card enter the arena from American Express, charging 439.9% APR, and this, coupled with interest rate rises from other providers, pushed the average APR to a new high of 29.6%."
The average annual rate of interest for credit cards right now has risen by 3.6% since September 2021 and 4.4% since September 2020.
How can I reduce borrowing costs?
Rachel said: "As the cost of living rises it is vital consumers keep up with their repayments and switch deals if they are being charged interest if they can.
"It is wise consumers check their credit score before they make any applications for a loan or card and seek advice if they are struggling with their debts."
Lighten your loans
If you took out a loan a couple of years ago, you might be paying over the odds.
Using a new loan on a lower rate to pay off an old one can sometimes make sense.
But remember, not everyone gets the rates advertised by lenders, as these are reserved for those with good credit ratings.
Check which loans you’re most likely to get without damaging your score by using an eligibility tool such as the one on MoneySavingExpert.com.
Blitz your credit card balance
Do not let credit card debt linger. If you’re just paying the minimum each month, it could take decades to clear.
Only making the average 2.5% minimum monthly payment on a £5,000 balance means it would take you nearly 38 years to pay back and cost nearly £15,000 in total, on a typical interest rate of 22%.
Switch to a balance transfer credit card to get a window of up to 34 months with no interest charged.
Break the total debt down into monthly payments and set up a direct debit to ensure you wipe the balance in that time. If that’s impossible, try to switch again to a new card.
But not everyone can get the top balance transfer deals, as they require an excellent credit score.
Find out which cards you’re most likely to get with the eligibility check on MoneySavingExpert.com.
Obliterate overdraft charges
Dipping into your overdraft can be one of the priciest ways to borrow, with some banks charging 40% interest – almost double the average credit card rate.
Move to a bank with a free overdraft. To pay off larger overdraft debts, a money transfer credit card could give you an interest-free respite, but beware of high fees.
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You can get free debt advice
If you're in debt there are plenty of services you can take advantage of and they offer free advice on how to manage debt.
Most of them can offer you free guidance and help in person, over the telephone or online.
- Money Helper – 0800 138 7777
- Citizens Advice – 0808 800 9060
- StepChange – 0800 138 1111
- National Debtline – 0808 808 4000
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