Small loan interest rates reach 10-year high

Despite record low interest rates, the rates charged on small loans have reached their highest level for more than a decade, according to financial information group Moneyfacts.co.uk.

The group found that banks and other providers are charging average interest of 12.7% on a £5,000 loan, up from 8.6% before the credit crunch and the highest level since May 2000.

The Bank of England's own findings, released earlier this month, suggested that interest rates on £5,000 loans had hit a record high of 15.58% during April - the 3.2% rise during the month being the biggest monthly change recorded since it first began collecting the data in 2005.

Moneyfacts has attributed the rise to the increased risk of people defaulting on small loans in the difficult economic climate.

Previously, lenders had offset the cost of low loan rates by selling payment protection insurance alongside them, but the industry now faces a £7bn to £9bn compensation bill for mis-selling the cover.

However, average interest rates on loans of more than £10,000 actually fell for the fourth consecutive month during April to 9.01%, according to the Bank of England.