Banks accused of 'profiteering' as interest rates on personal loans soar

The cost of the loans - typically used to pay for major purchases such as a car or home extension - have increased steadily during the recession, while the rate at which banks borrow has plummeted.

This comes despite Gordon Brown's efforts to persuade the banks to support families in the downturn.

Consumer groups said even borrowers with impeccable credit records were suffering because of lack of competition on the high street, and the banks' habit of "punishing the good for the sins of the bad" to boost profits.

The interest rate at which big banks can borrow money from the wholesale market tracks the Bank of England base rate.

Currently, banks can borrow at about 0.625 per cent, just above the record low base rate of 0.5 per cent.

However, the average interest rate on a £10,000 unsecured personal loan is now 10.96 per cent, the dearest since August 2002, according to Bank of England figures.

For a £5,000 loan the average rate is 13.52 per cent, the highest since official monthly figures began in 2005.

Lenders claim they have had to increase personal loan rates because of the bigger risk of default at a time of rising unemployment.

Vera Cotrell, financial services adviser at consumer group Which?, said: "Borrowers are paying the price for other people defaulting and for banks not doing credit assessments properly.

"No other company could get away with saying, 'Right, we're going to charge you a lot more for this product now because of our losses.'

"Banks are certainly taking advantage of the loss of competition in the market. You could probably call it profiteering."

Some of the steepest rates are from banks rescued by the taxpayer. According to financial website Moneyfacts, the highest rate on a one-year £1,000 personal loan is 23.9 per cent, offered by Lloyds TSB, which is 43 per cent owned by the Government.

The best rates, about eight per cent, are from the banking arms of Tesco and Sainsbury's.

Competition has been reduced because of the nationalisation of Northern Rock; the merger of HBOS and Lloyds TSB; the agglomeration of Abbey, Bradford & Bingley and Alliance & Leicester under Santander; and the withdrawal of non-bank lenders.

In September, banks and building societies approved £1.2billion of new loans, down 41 per cent on a year ago. A total of £57.8billion of loans are outstanding.

A British Bankers' Association spokeswoman said: "Banks are not profiteering. When they published their third quarter results they showed that most profits were coming from investment banking."