Early loan pay-offs 'cost £330m'

Banks say loan set-up costs must be covered

Banks are being accused of penalising borrowers to the tune of £330m a year for repaying loans early.

Four out five loan providers charge a penalty for early pay-offs, according to a survey by Internet bank Egg.

The bank wants the Department of Trade and Industry to ban the charges as part of its shake-up of the consumer credit market which is expected to be unveiled later this year.

However, lenders say the charges are necessary to cover the costs incurred in setting up the loans.

Mark Nancarrow, chief executive of Egg UK, said: "Our report shows that these penalties act as a financial straightjacket, ensuring that discerning borrowers, wishing to reduce their overall level of indebtedness, remain captive.

'Heinous fees'

"We hope that the DTI's long anticipated reforms of penalty charging - due to be published shortly - will finally abolish these heinous fees, creating a level playing field for all UK borrowers."

Egg said that of the 61 providers offering unsecured personal loans which it examined, 48 charged some form of penalty, usually one or two months' interest.

Its survey suggested that around 70% of consumers paid loans off early, and three-quarters said they would pay a loan off if they unexpectedly got some extra money.

But 65% of consumers said they would be put off doing this or moving their loan to a cheaper provider if they would be hit by an early redemption penalty, Egg said.

The survey also suggested the majority of borrowers did not know that they could be penalised for paying off a loan early - only 20% thought their loan had an early redemption penalty, whereas in fact around 79% of loans have such penalties.