Direct Line open for cheaper loans

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The Independent Online
DIRECT LINE, the cut-price insurance subsidiary of the Royal Bank of Scotland, is set to start marketing cheap personal loans in September.

The company is at present running a pilot scheme offering loans at annual rates of about 16 per cent to a limited number of its 1.2 million insurance customers. The loans are about 2 percentage points cheaper than the cheapest loans offered by the high-street banks.

Direct Line was set up in 1985 by its chief executive, Peter Wood, who had a background in insurance. His idea was to undercut the big-name insurance companies on motor and household insurance by marketing direct to the public and avoiding commission payments to brokers. Direct Line relies heavily on well-developed computer systems and telephone communication with its customers.

The move into personal loans could be followed by expansion into the savings market. Laura O'Connell, a spokeswoman for Direct Line, said the pilot scheme had been extremely encouraging. 'The results have been much better than expected. You would normally hope to get a 1 per cent response to an exercise like this, but our response has been well in excess of that.'

Direct Line has sent mail shots to a certain number of customers inviting them to telephone for more details about the loans. It expects to launch the service formally in September, although it is initially likely to continue targeting existing customers.

The average size of loan applied for has been pounds 3,000, according to Ms O'Connell. The minimum loan is pounds 1,000 and maximum pounds 10,000. Repayments can be spread over periods of between one and five years. A loan over 12 months would have an annual percentage rate (APR) of 16.4 per cent; over four years, it would be charged at 16.2 per cent.

Someone borrowing pounds 3,000 with Direct Line over 12 months would pay pounds 271.25 without loan protection insurance, and pounds 283.62 with insurance. Over two years, the same loan would cost pounds 146.25 without insurance and pounds 152.92 with.

Many lenders are still charging over 20 per cent (APR) on personal loans, especially for smaller amounts.

Lloyds Bank is offering one of the cheapest rates among banks and building societies. It charges 18.1 per cent on any amount between pounds 500 and pounds 10,000. A pounds 3,000 loan borrowed over 12 months would cost pounds 273.33 without insurance and pounds 296.02 with. The same amount borrowed over 24 months would cost pounds 148.04 without insurance and pounds 163.14 with.

Marks and Spencer has loans on offer at 17.3 per cent upwards with 0.5 per cent discounts for account customers.