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Banks accused of 'profiteering' as interest rates on personal loans soar
Jonathan Prynn, Consumer Business Editor16 Nov 2009
High street banks were accused today of "recession profiteering" as it emerged that interest rates on personal loans have risen to a seven-year high.
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."
Reader views (13)
To the British Bankers, from a person who used to work in retail banking and now deal with debt collection.
I am afraid your argument is null and void. I deal with both individuals and corporate bodies which get in to fiscal difficulties. I accept that some of those are self-inflicted, in so far as they knew that they could not afford that standard of living.
However, the banks DO take responsibility for lending. It comes back to Offer and Invitation to Treat (Fisher-v-v Bell- London, Court of appeal c.1960). In the court case, the Police lost the case on the grounds that Fisher (the PC pretending to buy an illegal weapon on display in a window) was making the offer to purchase, not the Defendant offering to sell. The turning point was that the knife did not have a label indicating price or other detail and it was the assumption by PC Fisher that it was for sale. He went in and offered to buy it, and the shop assistant (rightly) refused. Fisher arrested the assistant for trying to sell an illeagle weapon.
The Court of Appeal held that the knife, (with or without a price tag) was an invitation to treat (0r bid) for the public to make an offer for purchase, but it was not a statement of sale.
In this context the Banks knew very well what they were letting themselves in for adn shoiuld not underwrite debt which they know cannot be paid. The Banks make an offer to sell, the borrower merely asks how much. If the banks accepts- it is their fault. QED
- Chris Richards, Chelmsford Essex, 24/11/2009 13:26
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British Bankers' Association here. There is another side to this story, and one we keep trying to explain. The banks cannot borrow money at the Official Bank Rate nor anything like, so we do not believe this comparison is valid.
What is true though is that the era of easy credit is over. We simply cannot expect in future to pay the rates we did at the start of this decade, since we now know that in those days we were simply storing up the trouble which emerged with such devastating effect in the credit crunch.
Put simply, in a recession it costs banks more to fund loans to their customers. There is a lot of competition in the market, which puts paid to any opportunity for profiteering, but banks cannot go back to the rates they offered at the start of this decade.
- BritishBankers, London, 17/11/2009 17:09
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I am currently struggling to keep 6 people employed and off the dole queue and neither the government nor the banks have helped or sympathised in any way. Indeed I have just received notification that the interest on my business overdraft will now be charged at a rate of 19.8% - if this isn't profiteering I don't know what is. The establishment in this country sneers at small businesses and is is very disheartening to plod away every day just managing not to have to let staff go and feeling very alone. Greedy banks have dropped us into this mess and yet we are the ones wearing the thumbscrews and the Government do nothing. Small businesses are the unsung heroes and should be given the respect they deserve.
- Marie Harrison, London, UK, 17/11/2009 16:15
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Mr Cjs: "Banks can borrow at the base rate set by the BOE, but that is totally different from lending to high risk borrowers in an unsecured loan."
But banks should have learned the lesson that if the borrower is high risk, you don't lend to them. Which in the case of many would-be borrowers is probably to their advantage.
- Tonyb, Melbourne, Australia, 17/11/2009 09:10
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Interest rates on personal loans at a 7 year high ? perhaps if you look at the short term view, but they were much higher 30 years ago and then the banks were not short of money like they are now, you could get 12% interest on savings not the pitiful 3% you get now, and are we not the only country in Europe who doesn't pay charges on current accounts. My French bank charges me 10Euros per month just to be in credit, and its illegal to bounce a cheque, in the UK we have it easy, but times are a changing.
- Ann Other, UK and France, 17/11/2009 07:55
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the difference between o.6% and the loan rate of 10% is around 1600%. This is not a rip off then what is. If it was Fred the local loan shark charging 1600% then it would be headlines
- Mick Ogden, TelfordEngland, 16/11/2009 20:46
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Banks can borrow at the base rate set by the BOE, but that is totally different from lending to high risk borrowers in an unsecured loan. Britons are already highly in debt, in fact higher than any other developed nation.
Banks have contributed to this indebtedness by lending without checks against rising asset values, but, having caught a cold through bad loans, they are no longer willing to do so, hence the higher interest rates.
Government handling of this crisis is at fault. They should not have bailed out the banks but should have guaranteed savings and let these insolvent institutions go to the wall. The money saved could have been used to start up a national enterprise bank to step into the breach left by HBOS and RBS.
The taxpayer is still funding and covering the bad debts to these institutions and are in danger of Britain being bankrupted as a result.
Brown and Darling are the culprits, do not lose sight of that, all the noise about tearing up bankers contracts so they don't get bonuses is a huge smokescreen to hide government encouragement of the risk taking environment. Broon is now going to tear a hole in hard won employment law just to try and save his neck.
- Mr Cjs, herne bay, kent uk, 16/11/2009 19:56
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The cartel in the banking industry has to be broken up. Gordon Brown made a huge mistake when Lloyds and HBOS were merged. At a time when the foreign banks have either moved out or collapsed there is a real need for more competition - not less.
- Simon Walters, London, 16/11/2009 15:15
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"... most profits were coming from investment banking." Is this why ordinary savers are getting nothing? Surely interest from investment banking should go to the savers who provided it in the first place?
- Blind Pugh, Woking, UK, 16/11/2009 14:25
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'Banks coontinue to profit from their activities' should have been the headline.
They are in the business to make profit - if someone wants a loan - they pay - simple.
- Ancient Wisdom, London, England, 16/11/2009 13:58
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Applies to the credit card companies as well. My interest has gone from 15.9% to 34.9% APR in one year. How can this be anything BUT profiteering...
The justification in the circular was 'due to market conditions'....
- Emma, London, 16/11/2009 13:56
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Banks profiteering, of course they do, they rob the poor to pay the rich, always have and always will. The government does it every day.
- Mr S.Port, London, 16/11/2009 12:06
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Hear we go again the greed of banks has no boundarys and its allways the poor who suffer
- Richard Edmunds, Rayleigh UK, 16/11/2009 10:37
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