Consumer credit rates show signs of peaking after declines in first two months of 2023

Analysis of the latest Bank of England data on average quoted household rates from Freedom Finance, one of the UK’s leading digital lending marketplaces, raises hopes that the cost of consumer credit may now be starting to fall.

Coinciding with decreases in inflation, the data shows that rates on all major forms of consumer credit have declined between the end of 2022 through to February 2023, as follows:

  • £5k Personal Loans

Following seven months of consecutive increases, £5k personal loan rates have now registered two monthly declines. They have fallen to 10.08% in February 2023 from 10.19% in December 2022, but remain far higher than the 7.73% recorded in February 2022.

  • £10k Personal Loans

Similar to smaller-sized personal loans, £10k personal loan rates had recorded ten consecutive monthly increases to the end of 2022 reaching 6.01%. They have since dropped back to 5.94% as of February 2023 (vs 3.84% in February 2022).

  • Credit cards

Credit card rates reached their highest level this millennium last year as they hit 22.48% at the end of 2022. They remain at historic highs but have nudged down to 22.44% through to February 2023 (vs 21.44% in February 2022).

  • Overdrafts

Overdraft rates have been steadily nudging up since new regulations drove a spoke in the recorded average quoted rates. As with the above products they have dropped back to 35.24% in February 2023 (vs 33.95% in February 2022) from all-time highs at the end of 2022.

Despite the recent decline in the cost of borrowing, rates remain substantially higher than a year ago. This is particularly true of personal loans which are around two percentage points higher than February 2022 for £10k personal loans and around two and a half percentage points for £5k personal loans.

Total consumer credit borrowing reached £1.6 billion in January – its highest level since June 2022 – driven primarily by credit card borrowing alongside consumer confidence beginning to rebound despite remaining at historically depressed levels.

Andrew Fisher, Chief Growth Officer at Freedom Finance, commented: “Consumer credit has not escaped the economic and cost-of-living headwinds of the past year with average rates seeing substantial increases.

“However, with the interest rate raising cycle appearing to be near an end and the economic outlook brightening, I am delighted for our customers who can benefit from this as the cost of consumer credit borrowing starts to fall back just as we have seen in the mortgage market.

“If rates continue to fall we expect to see growing demand from consumers looking to consolidate debt, particularly those people who took out products when borrowing was at its most expensive. As ever, whether it is new borrowers or consolidators, following best practise and using all the tricks at their disposal will be vital to achieving good outcomes.

“This involves shopping around and comparing different products to ensure they are not just taking the first one on offer or an offer from their incumbent provider. Soft-search technology and digital marketplaces can help consumers with this by excluding products they are not eligible to avoid declines while extra data from open banking providers may even change a customer’s risk profile, opening up more products.”

The Freedom Finance Five-Point Plan for Consumer Credit

  1. Before you apply for credit, check to see if you have any existing debt and what rates you are currently on – there may be cheaper deals available. Beware of any hidden fees or charges and be sure to understand the total cost of any loan is, taking the option with the lowest monthly payments isn’t always the cheapest option overall.
  2. Always shop around for the cheapest deals and the most appropriate products by using soft searches that don’t harm your credit score. Digital marketplaces and online services can compare lenders without leaving a mark on your credit history.
  3. Consolidate debt where possible to help you keep track of repayments more easily while potentially moving existing debt to products with a cheaper rate. If you do extend the period of payments this could increase the overall amount that you repay so please pay attention to this.
  4. Once you have a new loan, prioritise paying off your most expensive debt first.
  5. If you are really struggling financially you may be able to get extra help, if you are not sure, check your eligibility for benefits like Universal Credit, Jobseekers Allowance and Housing Benefit which may reduce your need for consumer credit.