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Loans that disguise a sting in tail

CUSTOMERS are being tricked into paying thousands of pounds over the odds for loans, a Your Money investigation can reveal.

Shockingly, we have discovered that some of the UK's biggest lenders routinely quote for loans including expensive insurance – whether borrowers ask for it or not. The results underline the urgent need for the Office Of Fair Trading Inquiry into how 7.5 million Payment Protection Insurance (PPI) policies are sold each year.

The OFT decided to probe the £4billion-a-year PPI market following a super-complaint from Citizens Advice which claimed consumers were being mis-sold expensive PPI policies that often didn't even provide adequate cover. The investigation which revealed the protection racket was conducted for us by Paymentcare - an Independent provider of PPI. Six lenders were contacted three times each in a week and asked for a quote on the cost of a £7.500 loan over five years.

All of the lenders - the AA. Northern Rock. Lloyds TSB, Halifax, Egg and NatWest quoted monthly premiums that included PPI without being asked to do so. Although the AA. Lloyds TSB and NatWest also supplied quotes without PPI, only the AA properly explained the difference. Northern Rock. Egg and Halifax only quoted with PPI. The mystery shoppers had to specifically ask if insurance was included and then demand a quote without it. However, Halifax did admit PPI was not compulsory.

None of the lenders pointed out that PPI could be bought separately elsewhere. Paymentcare managing director Shane Craig said: "The shoppers were given the impression they would be disadvantaged if they didn't take out insurance but no attempt was made to establish if the cover was appropriate. "Sales teams are encouraged to use hard-sell tactics, as lenders make huge profits from PPI."

PPI can add thousands to the cost of the loan and is often useless. Only 15 to 24 per cent of PPI cover is claimed on, whereas 74 per cent of motor and 55 per cent of household insurance policies attract claims.

John Fingleton, OFT chief executive, said: "Borrowers may shop around for credit but lack of choice means that they are less likely to shop around for PPI. Our study will look at whether consumers are getting a good deal."

A recent PPI investigation by the Financial Services Authority found that many firms failed to check that customers were buying policies on which they could claim.

Nick White of comparison website added:" Our investigation into PPI highlighted that consumers opting for a £10,000 NatWest loan over five years would pay £3,000 more than with Paymentcare. "We would like to see lenders adopt a summary box-style approach to PPI so consumers can clearly see the cost of the cover and understand the level of protection, and thus suitability to their needs."

A Halifax spokesman said: "When the quote is provided we highlight that it includes an optional payment for PPI. The customer can change their mind at any point ahead of signing a loan agreement." Egg said: "We do quote PPI inclusive costs for our loans initially as we believe it's important product for many customers. It is optional and documents for the loan and the insurance with the individual costs specified." A Northern Rock spokesman said: "Without knowing exactly what was said on the phone it is hard to comment on this mystery shop. But before any application could complete the customers would have all the options fully explained to them."

•The table shows the significant differences in the cost of repayments with and without PPI from high street lenders.

LenderLoan RateWith PPIWithout PPITotal additional payment with PPI
Northern Rock5.7%£173.34£143.58£1785.60