Unsecured Loan Rates Likely To Increase June 24th, 2008
We reported recently about how the Financial Services Authority (FSA) are to investigate the sale of Payment Protection Insurance (PPI) in connection with loans and mortgages, following a high number of complaints from customers who have been unable to claim on such policies as they were not eligible for the benefits claimed for (for example, redundancy cover for a self employed person), due to being mis-sold the policy in the first place.
As a result of the investigation and tightening of the regulations with regard to this area of business, many lenders are finding the number of PPI sales they are making at the same time as arranging a loan for a customer is reducing, due to extra compliance checks leading to applications being rejected.
The main problem with this is that lenders receive a very good income stream from cross-selling PPI with a loan and the commission they receive from the PPI sale often subsidises the cost of the loan, particularly in the case of an unsecured loan, which tend to be for smaller amounts and therefore do not attract the same level of commission as a secured loan.
In order to replace this lost income stream and recoup their losses, it is expected that many lenders are likely to increase the rate of interest they charge on unsecured loans. It is also quite possible that rates on secured loans will increase, for the same reasons, although unsecured loans and probably bad credit loans are likely to see the biggest interest rate increases due the fact that they present a greater risk to the lender.
Finally, as lenders continue to tighten their lending criteria following the credit crunch, a much higher number of applications for unsecured loans and bad credit loans are being rejected. One spokesman for a large lender said that around 60% of unsecured loan applications were now being turned away.