Banks have massively hiked interest rates on personal loans during the slump, raising the cost of finance for cars, sofas, and other major purchases by hundreds of pounds, new research for The Independent shows today.
Figures from the personal finance group Defaqto show the average annual percentage rate (APR) on a £5,000 loan has jumped from 9.8 per cent to 13.9 per cent in the past two years, increasing the cost of borrowing by 42 per cent.
Banks and building societies have raised the cost of unsecured borrowing even as the Bank of England base rate has plummeted – between March 2008 and this month, the Bank's benchmark fell from 5.25 per cent to a 300-year low of 0.5 per cent. Over the same period, the cost of servicing a £5,000 loan on a three-year term, for example, has increased by £352 to £1,143.
During the same two years, which includes the six-quarter recession that ended in September, lenders have increased their APR on credit cards to a 12-year high of 18.8 per cent.
Banks are believed to be using the high rates to discourage unsecured borrowing, as they repair damage done to their balance sheets by reckless lending that threatened to push several into bankruptcy.
Figures from the British Bankers' Association show that its members have slashed their exposure to structured personal loans by £15bn in two years – from £67bn at the start of 2008 to £52.3bn last January. In January, banks lent 29 per cent less in the form of personal loans than they did the previous January.
Many banks will now only lend to customers with current accounts, and are matching loan rates more closely to the credit records of individuals. They are also rejecting more applications for credit – which poses difficulties for businesses reliant on consumer credit, such as car dealerships and furniture showrooms.
"There is not a great deal of appetite among the lenders to do lots of un- secured lending, and for the last few years there is a definite push towards 'quality not quantity'," said David Black, a banking analyst at Defaqto. "Many of the banks are focusing their un- secured 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."
He added that lenders were also making up for the loss of profits from Payment Protection Insurance (PPI), the lucrative policies traditionally sold with loans. Under new rules introduced by the Competition Commission in October, providers have been banned from asking borrowers to take out a policy to cover sickness or redundancy in the first seven days of a credit agreement.
Mr Black said: "The absence of PPI sales income is one of the main factors behind the rise in 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."
Several high-street lenders have announced hefty increases in rates on personal loans since the start of 2010.
In January the Halifax bank, now in the partially state-owned Lloyds group, increased its APR on loans below £5,000 from 18.8 per cent to 22.9 per cent, and for loans of £5,000 to £6,999, from 12.8 per cent to 19.9 per cent.
Last month, fellow high-street giant HSBC raised its APR from 8.7 per cent to 9.9 per cent. Marks & Spencer Money did the same for loans over £7,500.
Banks have also been forced to write off more bad debts as people struggling in the slump are unable to make repayments. Lloyds increased bad debt charges from unsecured lending by £1bn to £3.4bn last year, saying impairment losses were "sensitive to economic conditions, particularly unemployment levels".
Similarly, RBS Group wrote off £1.5bn of unsecured lending in 2009, up from £988m in 2008. In September, Nationwide building society said it was cautious about handing out loans, given the slump, and would continue to concentrate on "quality" lending rather than achieving more volume.
The Spanish banking group Santander slashed new unsecured personal lending by 36 per cent last year.
HSBC and RBS declined to comment. Lloyds said: "We offer personal pricing, so it's not linked to the Bank of England base rate. It's based on a number of factors that takes into account a customer's circumstances."