Loan penalties could face axe

By JO THORNHILL
Updated:

 

BORROWERS could soon be able to pay off their loans early without facing huge penalties, if proposals by the Department of Trade and Industry (DTI) get the go-ahead.

Around 70% of personal loans are settled early but most lenders impose a high early redemption charge. And the amount is down to the discretion of the bank or loan provider.

Abbey National borrowers are charged two months interest if they redeem early and their loan is for less than five years. If the loan term is longer the penalty is one month's interest. On loans of between £5,000 and £15,000 Abbey charges 7.1% interest. NatWest also charges one month's interest on early settlements - it's current typical annual rate is 12.9%.

The DTI said this practice is unfair and wants it replaced with a more accurate and transparent formula. Such a change could save consumers around £50 on their loan, according to the department. However, it is unlikely the new rules will be applied for credit cards and mortgage loans.

Consumer Minister Melanie Johnson has announced the launch of a consultation paper into the issue of redemption charges on loans.

'The formula used by many lenders to determine how much is owed in settlement favours the lender as opposed to the consumer,' she said. 'This is particularly true for long-term, high value loans. I am launching a consultation on this issue to explore options for making the early settlement terms fair to both lenders and borrowers.'

It is possible to get a personal loan from a provider that doesn't charge early repayment fees, such as Cahoot, Intelligent Finance and Nationwide.

Find the best personal loan from across the market by clicking here

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