Banks raking in cash with 'highest personal loan rates in a decade'

Banks are making record profits after hitting customers with the highest personal loan interest rates in almost a decade.

Loan rates average 12.4 per cent, despite the fact the Bank of England base rate is at a 300-year low of 0.5 per cent.

According to the Bank the amount borrowed rose by £ 52million - to £226.4billion - in December, the first increase since June.

Last night there was anger that taxpayers' cash used to bail out the banks is being loaned back at extortionate interest rates.

The average rate on a £5,000 loan repayed over three years is 12.4 per cent.

This is up from 12.1 per cent a year ago and 7.8 per cent in early 2006.

In 2001 the average loan rate was 12.5 per cent, but banks only made a 6.5 per cent profit as the base rate was 6 per cent. Thanks to the current low rate, bank profit margins are 11.9 per cent.

The latest personal loan figures were collated by finance experts at the moneyfacts.co.uk website.

Spokesman Michelle Slade said: 'There is no security that a personal loan debt will be repaid.

'In such a risk-averse market, lenders are only offering loans to the most creditworthy applicants and then at a premium.

'When people are struggling, unsecured lending is one of the first debts they stop repaying.'

The best loan deal is with Alliance & Leicester, which is charging 8.9 per cent on a threeyear £5,000 loan. This works out at £157.97 a month.

Andrew Hagger of the Moneynet.co.uk said one reason that headline interest rates are up is because finance giants have been prevented from imposing rip-off charges on the Payment Protection Insurance (PPI).

The best value deal at the moment is offered by Alliance & Leicester at 8.9per cent on a three year £5,000 loan

The banks have made billions of pounds for years by charging sky-high premiums on the insurance sold alongside personal loans. There is evidence many people were mis-sold the insurance, which is supposed to provide payment to cover essential bills in the event of sickness or unemployment.

The Competition Commission has ordered strict controls on the cost of the insurance and hard pressure sales tactics. However, it appears the industry has responded by simply putting up the price of the loans.

Mr Hagger said: 'With unemployment at a near 13 year high of almost 2.5 million, and many families struggling financially, it is no surprise that the level of competition in the unsecured loan market has subsided.

'Not only is the risk of defaults higher in the current economic climate, the highly profitable Payment Protection Insurance cash cow is no longer there to subsidise lower loan rates.

'With banks and building societies still adopting a far more cautious stance even when it comes to mortgage lending, even with your property as collateral, it’s no surprise that the appetite for unsecured lending has pretty much dried up.'