AS the Christmas spending spree gathers pace, there is a danger thousands of British households will be persuaded to spend more than they can afford by some of the most attractive personal loan rates in living memory.
Fierce competition among banks, building societies, and credit card providers is ensuring that consumers borrowing more than £5,000 appear to have a wide choice of suppliers charging barely 6 per cent But the headline interest rate figure (APR) may be only a vague guide to the total amount borrowers eventually have to repay.
"Consumers are led to believe the cheapest loan is the one with the lowest APR," said Richard Brown, chief executive of online financial comparison site Moneynetco.uk. "But loan packages do not always do what it says on the tin."
Though APRs reflect the cost of credit, they ignore the cost of other add-ons such as payment protection insurance (PPI) and early repayment penalties - which invariably generate fat profits for many providers. PPI is sold with the promise of protecting repayments on loans, mortgages, and credit card debts - and also offers to protect income against accident, sickness and unemployment. But PPI attached to personal loans - bought by 65 per cent of borrowers - has aroused the fiercest criticism.
The Government's City watchdog, the Financial Services Authority (FSA) is urging providers to improve sales practices by early-2006. On credit cards, 40 per cent of consumers pay for PPI, and 55 per cent take it on store cards. Though the FSA is broadly happy with PPI sold to protect mortgage repayments, it believes PPI sold with credit must be improved. Its "mystery shopper" exercise found that around half of firms providing it fail to lake reasonable steps to ensure customers do not buy policies on which they have little hope of making successful claims.
At Paymentcare, an independent broker offering PPI at a fraction of rates charged by High Street giants, managing director Shane Craig said: "One of the biggest scandals of PPI is that many people who buy it have little hope of ever making a successful claim; for example unemployment cover for the self-employed is usually no benefit whatever."
To break the monopoly of card companies, Paymentcare offers a stand-alone LASU policy (Life, Accident, Sickness and Unemployment) to protect monthly repayments on card balances for cardholders unable to make payments because of being unable to work.
Shane Craig added: "Credit card firms con customers in two main ways with card protection insurance — often by offering the first month's cover free to get them hooked, and then by playing on an average price point of only 79p per £100 of outstanding balance."
Paymentcare claims its cover is cheapest on the market - at 0.65p per £100 of outstanding balance, it allows borrowers to cover outstanding balances on as many cards as they wish, from £1,000 to £5,000. When you take a loan, or run up a credit card debt, shop around for quotes before you insure repayments. Take the lender's package and you are probably wasting money.
Pound Notes: First Direct claims its new simple repayment mortgage with a low initial rate and lowest standard variable rate from any major national lender other than First Direct's parent, HSBC, could save a £100,000 borrower more than £17,000 over 25 years. Borrowers can take a three year tracker at 4.99 per cent (4.85 per cent above £250,000), or a two year fix at 4.99 per cent. Enquiries: 0800 242 424.