Banks Increase Cost Of Personal Loans By 42 Per Cent

Mon, 15 Mar 2010

Personal loan interest rates have increased significantly in the past two years, according to new research carried out by personal finance group Defaqto.

The company found that the average annual percentage rate (APR) on a £5,000 bank loan has risen from 9.8 per cent in 2008 to 13.9 per cent – a hike of 42 per cent.

According to Defaqto, banks are increasing their rates in an effort to discourage reckless unsecured borrowing which nearly forced some lenders into bankruptcy during the downturn.

David Black, a banking analyst at Defaqto, said: "There is not a great deal of appetite among the lenders to do lots of unsecured lending, and for the last few years there is a definite push towards 'quality not quantity'."

"Many of the banks are focusing their unsecured lending on existing customers; so to get an unsecured loan or credit card from HSBC or RBS you now have to have a current account with that provider."

Mr Black added that the absence of income from Payment Protection Insurance policies, which are traditionally sold with loans, has also been a major factor in the banks decision to increase unsecured loan rates .

"The banks used to make a big profit from selling payment protection insurance in conjunction with unsecured loans, but this income stream has reduced substantially," he said.

The Defaqto findings come after figures from the British Bankers' Association revealed that lending in the form of personal loans was down by nearly a third (29 per cent less) in January compared to the same period in 2009.
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