Loan Rates Increase To Cover Cost Of PPI
We reported several months ago that the Office of Fair Trading (OFT) and Competition Commission (CC) were conducting an investigation into the sale and marketing of Payment Protection Insurance (PPI) alongside the arrangement of a new personal loan.
As a result of this investigation, it was decided that consumers were not being given sufficient time to shop around for their loan protection policies in order to save money, or find something more suitable than the cover offered by the loan company and therefore a ban was placed on selling a PPI policy to a customer at the same time as a new personal loan and lenders would have to wait 14 days before approaching a borrower for this cover.
It is well known that loan companies make as much profit from the sale of a PPI plan as they do from arranging the loan which it is designed to protect and with the lost revenue from borrowers either getting their cover elsewhere, or simply not bothering with loan protection, it was feared that the cost of a personal loan could increase to compensate for this lost income stream and recent figures show this to now be the case for many individuals looking for a new loan.
The typical rate on a personal loan now stands at 10.32 per cent, annual percentage rate (APR), a premium of almost ten per cent above the Bank of England base rate. Twelve months ago, before the ban of PPI sales at the same time as a loan, this difference was just 3.4 per cent and the rate for a small loan of just £5,000 is almost 2 per cent higher than it is on a loan for £10,000, whereas twelve months ago this difference was only 0.15 per cent.
Tim Moss of moneysupermarket.com said “Despite the Bank of England slashing base rate to 0.5 per cent in March, loan rates have continued to rise, leaving consumers paying through the nose for their personal loans. We have seen a glimmer of hope as loan rates crept down slightly in August. Competition seems to be returning to the loan market which is great news for consumers, however, lenders will need to continue reducing rates if they want to draw customers back, particularly those who want to reconsolidate their debt.”
