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Loan profits increase tenfold
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Banks may be unwilling to lend money, but when they do they’re making 10 times what they did three years ago. If you’re looking to take out a loan, find out how best to borrow
Times are tough for those who need to borrow money. Interest rates may stand at a historic low of just 0.5% – but banks are charging a premium on loans and mortgages.
New research from moneysupermarket.com shows that those looking to take out a £5,000 personal loan will now be charged, on average, an eye-watering interest rate of 10.3%.
Three years ago the average APR (annual percentage rate) on a £5,000 loan was just 5.9%, despite the fact that the Bank of England base rate stood at 4.75%.
Then banks charged a margin of just over 1.15 percentage points over the base rate. Today, this margin is almost 10 percentage points. In other words, banks are making profit margins 10 times higher on these loans.
Those looking to borrow more face a similar increase, although the rate they pay will be marginally lower. According to moneysupermarket.com those looking to borrow between £10,000 and £25,000 will pay an average of between 8.4% and 8.75%. Three years ago the average lender charged less than 6% on these loans.
A similar picture emerges when you look at the rates charged for fixed mortgages. These deals are becoming increasingly popular with homeowners, worried about future rate rises. But the margins charged on these deals are now at the highest level for 20 years.
Soaring costs
So, why are banks charging so much when interest rates are so low? The answer is simple. The credit crunch has made banks extremely risk-averse. They’re far more cautious about who they’ll lend to: more loan applications are now turned down flat, particularly from those who’ve had previous credit problems, whose job might be at risk or who cannot prove their income.
But even people with good credit records are being asked to pay more, as lenders try to rebalance their books. Not only have banks and building societies lost millions on bad debts and the fallout from the financial crisis, they are no longer allowed to blanket-sell highly profitable payment protection insurance to customers taking out a loan.
Tim Moss, the head of loans and debt at moneysupermarket.com said: “We have seen a recent glimmer of hope as loan rates crept down slightly in August. Competition seems to be returning to the loan market which is great news for consumers; however, lenders will need to continue reducing rates if they want to draw customers back, particularly those who want to reconsolidate their debt.”
He points out borrowers also need to change their behaviour if they want to secure a loan in these “post-credit crunch” days.
Last updated 25 August 2009
