Massive rise in interest rates on personal loans
Cost of borrowing jumps by 42 per cent as banks seek to discourage bad debtors
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."
Five Questions: Changes to car tax discs
Ticking time bomb: Interest rate rises are coming, so start preparing now
More than 300,000 adults are too deeply in debt to apply for bankruptcy
What is pension death tax, what is going to change and how will it affect you?
Almost two million people are facing winter weather without heating
- 1 Snoop Dogg and Jared Leto buy a stake in Reddit as A-list invests $50m
- 2 HeForShe campaign: Iceland to follow up Emma Watson speech with UN women's rights conference – for men only
- 3 Car tax disc changes: Two days to go - and they affect you much more than just not displaying a piece of paper
- 4 Ed Sheeran dedicates song to David Cameron
- 5 Now we know whose fault it is if you end up being murdered in Thailand
Isis, we are told, is a 'clear and dangerous threat to our way of life'. I’m sorry, but I just don’t buy it
Exclusive: 'Putin's Russia has been my biggest regret,' says Nato's outgoing Secretary General
The Osborne Ultimatum: Chancellor’s benefits freeze bombshell will affect ten million households
There’s no excuse for Dave Lee Travis’s behaviour, but we need to keep a sense of proportion
Mark Reckless becomes second Tory MP to defect to Ukip in a month
Should gay sex be illegal? 16% of Britons think so
- < Previous
- Next >
iJobs Money & Business
£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...
NEGOTIABLE: Austen Lloyd: TRUST ACCOUNTANT - KENTIf you are a Chartered Accou...
£18000 - £20000 per annum + OTE £30000: SThree: SThree are a global FTSE 250 b...
Highly Competitive Salary: Austen Lloyd: CITY - Law Costs Draftsperson - NICHE...
Day In a Page
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors