Insurance threat to loans

Borrowers may have to pay more for their personal loans as banks could be banned from selling lucrative loan insurance products or forced to charge less for them.

A report from the Competition Commission this week claimed banks were making £39 excess profit on every £100 of payment protection insurance (PPI) they sold.

An investigation was launched into PPI last year over fears of serious mis-selling. Loan providers have aggressively sold the insurance alongside loans at often inflated commission rates.

But independent companies have been providing cover at much cheaper rates. So any decision to prevent the banks selling PPI alongside loans or introducing price caps could invigorate the third-party sales market.

"We can expect the price of PPI to diminish as there will be more competition to sell this product," said Stuart Glendinning, managing director of comparison site, moneysupermarket.com.

However, the downside is that interest rates on personal loans could rise. I expect this to happen quickly if the Competition Commission press ahead with their proposed changes - it may even happen immediately," said Glendinning.

Banks have said that excluding them from the market could leave many borrowers uninsured against losing their jobs or falling ill. With the economy slowing and redundancies rising, this may happen at just the wrong time.

"If some of the recommendations are adopted, it could leave customers exposed," said Angela Knight, chief executive of the British Bankers Association.

source : http://uk.biz.yahoo.com/06062008/399/insurance-threat-loans.html