PPI ban could increase personal loan rates

Friday, 14 November 2008 11:02

A ban on payment protection insurance (PPI) could increase the cost of loans, as lenders try to claw back lost revenue.

Today the Competition Commission (CC) put forward plans for lenders not to sell PPI until 14 days after a loan is sold - but there are now warnings this could push up the cost of borrowing.

Earlier this year the CC estimated UK lenders make as much as £2.6 billion a year from PPI - with profits up to 982 per cent on the sale of the insurance policies.

On average each policy earns lenders £1,200.

The banks are now warning if the CC plans go ahead, PPI could cease to be available.

Without this revenue stream, there are warnings the cost of personal loans could rise.

The Finance and Leasing Association (FLA), which represents a wide variety of lenders who also sell PPI, specifically said without this insurance loan rates will rise.

FLA director general Stephen Sklaroff said: "The loss of single premium PPI will also result in worse terms for many customers.

"The commission's proposals, which will raise the cost of credit, have ignored the prime minister's concerns about rising interest rates."

Andrew Hagger from Moneynet.co.uk added: "The possible downside of these proposed reforms is that lenders may have been subsidising their lending rates with the vast profits generated by PPI sales.

"If the new measures eat into lenders massive PPI revenue streams, there is a real danger that it may be recouped from the customer in the form of higher interest rates on credit products."

The difference between taking out a loan with insurance and one without can mean the difference between borrowing money at 17.8 per cent and 7.9 per cent, warned David Kuo, head of personal finance at Fool.co.uk.

"PPI has not only been the icing on the cake but the cake itself for loan providers," he said.

"So borrowers need to be alert to a possible backlash from loan providers following the Competition Commission's move to ban PPI distributors from flogging the insurance at the same time as selling the underlying loan.

"After lenders have tasted gateau worth £5 billion in annual revenues, stale sponge doesn't quite have the same appeal anymore."

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