Loan and Mortgage Rates Could Rise

Commentators have welcomed moves by the UK's Competition Commission to ban the sale of controversial Payment Protection Insurance (PPI) alongside credit agreements in 2010. But some have warned that this could mean that loan and mortgage rates could rise.

In its final report into PPI, the Commission announced a ban on the sales of PPI at the time the credit agreement is sold. In addition, the practice of charging a one-off upfront premium was banned. This has been thoroughly criticised because most lenders ended up adding the premium to the loan and then charging interest on it.

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The Commission says that PPI policies, which are designed to cover the monthly repayments for mortgage, loan, or credit-cards if the borrowers fall sick, have an accident or lose their jobs, should not be sold within seven days of the borrower agreeing to the credit agreement.

The Commission also decided that it should be easier for people to shop around and switch between insurance companies. The advantage of selling the insurance at the same time as signing up people for their credit agreement, has meant that lenders have faced little competition for PPI. As a result they have exploited their position by charging very high prices for the insurance.

There is little doubt that increased competition will provide consumers better choice and with lower prices. However, commentators are worried that while the moves will make the credit industry to clean up its act, they could react by putting up the cost of borrowing. This is because some lenders claimed that they subsidised lower interest rates with commission income from PPI.

And figures from the financial industry seem to support that. Smaller loans have seen the biggest increase, with the average interest rate for an unsecured loan of 1,000 ponds now starting at 19.8 per cent, while the average rate for a 5,000 pound has jumped to to12 per cent. Only a few years ago, the battle between lenders was so intense that rates were as low as 5.4 per cent, but now the lowest rate is around 7.8 per cent - and you have to secure your loan against your home to get that deal.

But most high street banks have announced that they have already stopped selling PPI alongside credit - well in before the 2010 deadline imposed by the Commission. However, some commentators like us, are not convinced by their motives. Although some banks have withdrawn single-premium PPI policies, it is probably because they are safe in the knowledge they have already protected their profit margins by increasing their interest rates on credit-cards and loans.

But the insurance industry's trade body, the Association of British Insurers, stressed the importance of the PPI in the current economic downturn. It said that its figures showed a 118 per cent annual increase in unemployment claims on PPI.

What the Association of British Insurers has not admitted is that the cost of PPI has also seen a big increase. And one major UK insurer has even totally withdrawn from the market.

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