Cost of loans soars
Lenders have been accused of ripping off borrowers after new figures show the cost of personal loans has soared over the past year.
People looking to take out a personal loan can now expect to pay in the region of 12.27% APR up from an average rate of 8.71% in 2004, according to moneynet.co.uk. With the Bank of England base rate remaining at just 0.5%, this means lenders’ margins have shot up from 3.96% to 11.77%.
Andrew Hagger, spokesman for moneynet.co.uk, says the jump in the cost of borrowing reflects the changing financial landscape. “When credit was plentiful, lenders were keen to offer low rates to get high volumes of business, hopefully with the payment protection insurance (PPI) icing on the cake,” he explains.
“Now the situation is totally different, credit is tight, bad debts are rocketing and loan providers are far more cautious but operating on a vastly increased margin.”
As well as funding streams drying up, lenders can no longer rely on profits from PPI. Unemployment and missed payments are also on the rise, meaning the risks of borrowing are higher.
According to moneysupermatket.com, people looking to borrow £5,000 are facing the highest rates. Tim Moss, head of loans and debt at the price comparison website, says people looking for a loan of £10,000 can now expect to pay nearly 2% less than those looking to borrow half that amount.
He adds: "We have seen a recent 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.”
Payment protection insurance is designed to cover you should you fall ill, have an accident or lose your job and can’t make repayments on loans or credit cards. However, research by consumer watchdogs found the cover to be overpriced, filled with exclusions (policies exclude self-employment, contract employees and pre-existing medical conditions) and were often mis-sold because the exclusions were never fully explained. In May 2011, the High Court ruled banks had knowingly mis-sold PPI and ordered them to compensate around two million consumers.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.