Bank profits up and loan rates up as well

Michelle Slade, personal finance analyst at moneyfacts.co.uk comments: “Exactly one month ago, moneyfacts.co.uk reported that sub six percent loans were becoming an endangered species. Today, such loans are close to becoming extinct with only one loan provider to offer a sub six percent loan: Masterloan, with 5.9% (typical) on advances between £5K - £15K

“For the last two years, concerns have been raised over the level of indebtedness many consumers face. With growing numbers of IVAs, bad debts and defaults, we are not surprised to see lenders becoming more cautious about their lending. However the markets for loan borrowing and credit card borrowing seem to be reacting in different ways.

“As the 0% credit card market continues to flourish, with deals in excess of 12 months easily found (although lending criteria has been tightened), it is the more structured lending which seems to be bearing the brunt. In the last week, eight personal loan providers increased interest rates by around one to two full percentage points, and in one instance by seven per cent.

“So why is this happening?

Are loan providers pre-empting the consequences of the Competition Commission’s intervention into the PPI market? With lending margins still very low, PPI is the main revenue earner for lenders. So if forced to make loan insurance more competitive, it will have a serious impact on the profitably of lending.

Are loan providers suffering due to increased levels of bad debt? With the 07-registration plate launched last week, are lenders pushing up prices when demand is potentially higher?

There seems to be no straightforward answer to why loan rates are spiralling, it could be a combination of some or all of these factors, or simply a result of previous competition in the personal loans market driving prices to a level which was simply not sustainable.

“The recent rate increases have contributed to making small loans even more expensive. Today small loan rates (typically £3K to £5K) can be over twice as expensive as a larger loan from the same provider, with rates comparable to the average credit card standard rate. So if it’s only a small amount you wish to borrow, then used correctly a 0% or a low life of balance deal on a credit card will undoubtedly save you money.

“There has however been two positive announcements for borrowers this week: Barclaycard Loan has launched a new rate of 6.1% for loans between £4K and £15K, and IF has reduced its rates on its loan without redemption penalty by up to 2.2%.

“With over 60 personal loans available, all easily searchable at moneyfacts.co.uk, make sure you do your homework before signing up. Remember it does not always pay to remain loyal to your current account provider, as automatic credit systems will predominantly determine the price you pay, not how well the lender knows you or how long you have banked with them. But take care when looking at advertised rate. Over 85% of personal loans are now typically priced, which means the rate advertised may not be the rate you receive. This will be determined by your credit rating.

“And finally, remember the cost of payment protection (PPI) insurance and the levels of cover provided vary from lender to lender, so factor this into any comparisons you make. And if you shop around for your PPI from providers such as paymentcare.co.uk or British Insurance.com, there are some huge cost savings to be made.”