Hurry, hurry: cheap loans can't last

Christmas is coming, but it doesn't come cheap. Many who need to cover a festive shortfall will find themselves encouraged to take out a personal loan, as this can often work out cheaper than borrowing on a credit card or arranging an overdraft.

For months, lenders have been offering deals with interest rates well below 6 per cent in a battle to top the best-buy tables. However, low-cost loans could soon be off the shopping list as, in the past two weeks, three providers have increased their annual percentage rates (APRs) by up to 0.2 percentage points.

Following a quarter-point rise in the Bank of England base rate to 5 per cent, Northern Rock has upped rates from 5.7 to 5.9 per cent, and the Moneyback Bank from 5.6 per cent to 5.8 per cent. The AA has notched its rate up to 6 per cent from 5.9 per cent.

"We predicted that the end of the sub-6 per cent era would soon be upon us," says Nick White from Uswitch, the price comparison service. "This is a clear signal that these loan rates will disappear in the not too distant future, to be replaced by less competitive deals."

Six months ago, 10 providers offered sub-6 per cent APR deals - with Moneyback Bank topping the tables with a 5.5 per cent APR loan. Now, only seven lenders offer deals below 6 per cent: the most competitive of these is Masterloan's 5.7 per cent.

"Consumers planning to take out a loan in the next few months should act sooner rather than later to enjoy a sub-6 per cent rate before they disappear completely," Mr White says.

Borrowers should be aware that only those with an excellent credit rating benefit from the low rates.

Although lenders can advertise the "typical" low loan rates only if at least two-thirds of applicants qualify, you may find yourself disqualified from the very best deals. Sub-6 per cent rates have always been hard for lenders to maintain as profit margins on these products are slim.

Many providers have subsidised the cost of these loans by selling bolt-on insurance - soon to be investigated by the Competition Commission. Known as payment protection insurance (PPI), it is designed to protect you if you fall ill, have an accident or lose your job and can't make repayments. But it can be overpriced and riddled with exclusions.

Mr White warns that, with the impending Commission investigation into PPI, loan providers could lose part of their income stream.

"They will either have to look elsewhere to prop up these low loan rates - or increase them," he says.