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Why is the cost of personal loans still rising?

While many of the headlines in the UK are taken up by the banking sector, the mortgage industry and the property sector, many people have overlooked the personal loans market which has proved very difficult to forecast over the last few months. Despite UK base rates remaining at 0.5% for some time, many personal loan rates have been increasing gradually over the last few months. So what is going on?

As we have mentioned on numerous occasions, there is reduced liquidity in the UK financial sector as UK banks fear the worst in the short to medium term and look to reduce their exposure to any potential economic downturn over the next 12 months. As a consequence, due to the risk reward ratio, we have seen rates charged on personal loans continue to creep higher with more and more people being refused access to such services thereby reducing the overall profitability of the sector.

However, this could turn out to be something of a self-fulfilling prophecy with a worst-case scenario often encouraged by reduced liquidity and higher interest rates. Customers who were "comfortable" with lower personal loan rates may well start to suffer as rates creep higher, unemployment continues to grow and "free money" is reduced in the UK.

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