The average interest rate on personal loans in the UK has reached its highest level in over ten years according to new research from the financial analyst Moneyfacts.

The rise has been attributed to increasing numbers of people defaulting on personal loans as well as the banks need to increase revenue from other sources after the recent PPI judgement.

Personal loan interest rates rise to highest level since 2000

According to the financial analysts Moneyfacts, the average rate on a £5,000 personal loan is now 12.7 per cent.  The last time that rates were at this level was in May 2000 when the Bank of England Base rate was 6 per cent, compared to 0.5 per cent today.

Michelle Slade, a spokesman for Moneyfacts said: “Unlike on a mortgage, there is no security a personal loan debt will be repaid.

“In a market where household finances are being stretched the risk of customers not repaying the loan increases and this is passed onto customers through higher loan rates.

“A few years ago lenders offset low loan rates by recouping revenue through payment protection insurance, but recent judgments mean this is no longer possible.

Experts urge consumers to shop around to compare personal loans

Moneyfacts found that there was a difference of £1,200 in the payments between the cheapest and most expensive loan, highlighting how important it is for consumers to shop around and compare personal loans.

Ms Slade told the Daily Telegraph: “Most people’s first port of call for a loan is their bank, but in most cases this is far from the cheapest option.

“The price war between supermarkets isn’t just on groceries, it has spilled over into the personal finance market. On nearly all loan amounts the supermarkets have the most competitive rates.”

The newspaper reports that the best rate currently available on a three year loan of £5,000 is from Sainsbury’s Finance at 8.2 per cent.  This is compared to 8.8 per cent back in 2000 and 5.6 per cent in 2007, before the ‘credit crunch’.