Rates on personal loans have increased sharply in recent months, and borrowers are now facing the highest repayment levels for six years.

The lowest rate currently obtainable for a £5,000 loan over three years is 7.6% APR from Moneyback Bank, according to Moneyfacts, the independent personal finance information provider. But many consumers going straight to their bank could be paying a much higher price. The same bank was charging 6.3% a year ago, and 5.6% in August 2006.

"In the last few years the market for personal loans has been extremely competitive, as lenders and borrowers alike cashed in on the availability of cheap credit. Increased competition pushed prices down and lenders continually undercut each other in order to top best buy tables,” said Michelle Slade of Moneyfacts.

"Since August 2006 the average rate on offer for a £5,000 loan over three years has increased by just under 3%, from 8.1% to 11.0% today. With no real signs that conditions are going to get better in the near future, rates could get much higher yet.

"This is extremely bad news for consumers who may be considering consolidating existing debts to try to drive down their monthly expenditure.

"At a time when every penny counts, if you need a personal loan you need to make sure that you shop around as it is highly unlikely that your bank will offer the best deal. Currently on a £5,000 loan there is a difference between the cheapest and most expensive loan of £25.55 per month, which equates to £919.80 more over three years.

"Another point to bear in mind is payment protection insurance (PPI). This is where most companies make their money and the amount charged varies from lender to lender. A loan that offers the lowest rate without PPI may not be the cheapest loan once it is included. If you need PPI, it is worth considering independent providers who offer the same level of cover at a much lower price."

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