Banks boost margins with 12% loan rates

Published 25th Aug 2009

Borrowers looking to take out personal loans are having to pay double digit premiums over the base rate as banks increasingly stretch their profit margins.

New research from Moneynet.co.uk shows that the average unsecured loan rate has risen from 8.71 per cent to 12.27 per cent in the past five years, while the base rate has dropped to its lowest ever level.

“With base rate now a mere 0.5 per cent compared with 4.75 per cent five years ago, lenders margins have shot up from 3.96 per cent to a staggering 11.77 per cent,” said Andrew Hagger at Moneynet.

He pointed out that back in August 2004 Northern Rock was offering a loan rate of 5.8 per cent, which would have provided a margin of just 1.05 per cent. But now the best rate, available from Sainsbury’s finance, is 7.9 per cent, generating a margin of 7.4 per cent for the bank.

“When credit was plentiful lenders were keen to offer low rates to get high volumes of business,” added Hagger. “Now the situation is totally different, credit is tight, bad debts are rocketing and loan providers are far more cautious but operating on a vastly increased margin.”

Research from Moneysupermarket.com found that borrowers looking for smaller loans, of around £5,000, are being hit harder than those looking to borrow more.

Tim Moss, head of loans and debt at Moneysupermarket, said banks and building societies were being more cautious about who they will lend to than in pre-credit crunch days.

“Some lenders are introducing market leading deals, but these are restricted to customers who have an existing relationship,” he explained.

One reason banks may be charging more for personal loans is that it has become more difficult to sell payment protection insurance (PPI) alongside loans. This insurance was extremely lucrative for banks and helped to boost their margins. Without it many have had to charge more for the actual loan.

“The clampdown on the sale of PPI has caused providers to hike up prices to recoup lost revenue. As a result is has become increasingly difficult to get a competitively priced loan,” said Moss.

Also, fewer banks are offering unsecured loans as they become more concerned about rising bad debts.

Moneynet said there had also been a move towards “personal pricing”, where loan rates are not advertised and the applicant is unaware of the rate they will be offered until they apply.

Source: ' FT '

View All Latest Articles