Lenders are increasing the rates they charge on personal loans following the recent hike in interest rates, a financial information group has said.

Moneyfacts said that although unsecured loans were not directly linked to the Bank of England base rate, a trend had emerged among lenders to "tweak" their rates quickly following a rise in the cost of borrowing.

It added that while interest rates had only increased by 0.25%, some banks were raising their loan rates by as much as 1%.

The group said lenders may be increasing their rates, which will only apply to new customers, due to a combination of higher costs and having to increase the provisions they make for people who default on their debt.

The move is further bad news for increasingly hard-pressed homeowners, many of whom have seen their monthly mortgage repayments increase five times during the past 12 months.

Lisa Taylor, an analyst at Moneyfacts, said: "Despite the rises we have seen over the last 12 months, there are still some very competitive deals to be found, especially if you are looking for loans of £5,000 or above.

"However smaller loans are becoming far more expensive, with rates of 20% now commonplace - almost 3.5 times the level of base rate."

She said people looking to borrow less than £5,000 should think about looking at other forms of credit, such as credit cards.

She said: "For short term borrowing a 0% credit card deal should be first choice, but for those looking to spread their debt repayments over a longer term, low standard rate cards with purchase rates under 10%, are a competitive alternative.

"Marks & Spencer money are still offering a balance transfer for life rate of 4.9% APR on their &more credit card with no balance transfer fee, which looks extremely good value in the current market."

Source:channel4.com