Loan rates highest in a decade

Bank loan rates have climbed to their highest level for more than a decade amid fears about borrowers failing to meet their repayments.

Analysts said banks are raising rates to recoup the losses stemming from people defaulting on their loans.

They suggested banks had previously boosted their revenues by charging for payment protection insurance, but a recent judgment means this is no longer possible.

The average rate on a £5,000 personal loan is 12.7 per cent, according to personal finance website Moneyfacts.

The rise comes despite the Bank of England keeping interest rates at a historic low of 0.5 per cent for more than two years.

Rates were last at their current level in May 2000 when the Bank Rate was a much higher 6 per cent, meaning banks have significantly increased their profit margins on personal loans.

Michelle Slade, a spokesman for Moneyfacts.co.uk said: “Unlike on a mortgage, there is no security a personal loan debt will be repaid.

“In a market where household finances are being stretched the risk of customers not repaying the loan increases and this is passed onto customers through higher loan rates.

“A few years ago lenders offset low loan rates by recouping revenue through payment protection insurance, but recent judgments mean this is no longer possible.

The research suggested a £1,200 difference between the cheapest and most expensive loan.

Ms Slade added: “Advertised representative loan rates only have to be offered to half of successful applicants, so some customers could find they are offered higher rates than those shown.

“Most people’s first port of call for a loan is their bank, but in most cases this is far from the cheapest option.

“The price war between supermarkets isn’t just on groceries, it has spilled over into the personal finance market. On nearly all loan amounts the supermarkets have the most competitive rates.”

The best rate currently available on a three year loan of £5,000 is from Sainsbury’s Finance at 8.2 per cent or £165 a month. It is in sharp contrast to rates of as low as 5.6 per cent before the beginning of the credit crisis in 2007. The best rate was 8.8 per cent in 2000.

FACT 

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In April, the High Court dismissed attempts by Britain’s banks to overturn new rules on the sale of PPI, which require insurers to review past sales of PPI, even where customers have not complained.

Banks have since confirmed that they are dropping the legal action and will now pay out millions in compensation to customers instead.

PPI policies are meant to repay people’s loans if their income drops due to unemployment or illness. But many people were unaware that they were paying for the insurance or they did not need it - and some, such as the self-employed, signed up to the policies even though they were ineligible to claim.