Loans Expert

The cost of personal loans is expected to increase after banks were told they should be banned from loading them with “extortionate” insurance policies.

The Competition Commission said companies should have to wait 14 days after a customer has taken out a loan or credit card with them before they can contact them about buying the payment protection insurance.

The PPI policies are usually sold alongside loans and credit cards, car finance and occasionally mortgages. They are designed to offer borrowers peace of mind that their repayments will be covered in times of crisis.

However, the controversial policies add, on average, ?953 to a ?5,000 three-year loan. The commission has alleged that banks make ?1.5 billion in excess profits from them.

The commissions proposals come after it found evidence that the high price of PPI was being used to cross-subsidise the interest rates on personal loans offered by some providers.

It publishes its final report in January, when it will outline the measures that will be introduced.

Financial experts said if the proposals were implemented, it would help prevent aggressive tactics being used to sell the policies.

Andrew Hagger, of financial comparison website Moneynet.co.uk, said: “The proposal to prohibit the sale of extortionate PPI policies at the time the lender grants credit to a customer is very welcome.

“It will give consumers the opportunity to weigh up the costs and benefits of such cover without feeling pressured by front line staff with one eye on their monthly sales target.

“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.”

But trade bodies warned that the proposals could prevent vulnerable customers being protected during the economic crisis.

The British Bankers’ Association said: “Clearly now, more than ever, it is vitally important to think about how you can meet your commitments if you lose your source of income.

“The Competition Commission is simply wrong to suggest people should be prevented from taking advantage of products designed specifically to cushion the effects of accident, sickness and unemployment at the very time they are considering taking out a loan.”

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Tags: Personal Loans