“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,” Michelle Slade, analyst at Moneyfacts.co.uk, commented. “Increased competition pushed prices down and lenders continually undercut each other in order to top best buy tables.”

She said that 2006 saw the lowest loan interest rates on offer, with the average rate for a £5,000 loan at 8.1 per cent, but since then the average interest rate has risen by nearly three per cent to 11.0 per cent this year.

Ms Slade lamented: “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.”

It is therefore crucial not to go for the first loan on offer, Ms Slade warned: “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 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,” she said.

Moneyfacts.co.uk also advises consumers to bear in mind payment protection insurance (PPI) before they take out a loan. Many providers make their profit on PPI, and the amount they will charge differs from lender to lender.

“A loan that offers the lowest rate without PPI may not be the cheapest loan once it is included,” Ms Slade explained. “If you need PPI, it is worth considering independent providers who offer the same level of cover at a much lower price.”

© Fair Investment Company Ltd