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£350 borrowed for 30 days. Total amount payable by one repayment: £434.
Total interest payable by one repayment: £84. Representative APR 1223.6% (Variable)
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Interest : £0
Repayment : £0

Personal loans handed out without checks

The deepening credit crisis is driving up the cost of taking out a loan, despite the cuts in the Bank of England base rate.

Yet lenders are still failing to carry out proper checks to make sure that borrowers are able to repay them.

The average rate on a three-year £5,000 unsecured personal loan has risen from 8.2% to 9.9% in the past year, adding about £300 to the cost, according to financial data provider Moneyfacts.

But this has not deterred borrowers. Bank of England figures for February show that new consumer credit rose by £2.4bn. In January that figure rose by £900m.

Alarmingly, many of these loans are being taken out without lenders seeking proof of borrowers' income, credit experts say.

According to price comparison service, only 30% of loan applicants in the past 12 months were asked to prove how much they earn.

And 45% of consumers taking out an unsecured loan did so with a company other than their own bank. This leaves the lender with comparatively little information about the person's ability to manage debt.

Moira Haynes of Citizens Advice is critical of this 'loose' lending. Even in these troubled times two out of three borrowers don't need to prove their salary

'We see far too much evidence of people having been lent money where it was clear from the start that they would not be in a position to repay it,' she says. 'We have repeatedly called on lenders to carry out thorough checks and it is imperative that this is done.'

Mike Naylor of agrees: 'With more than 7,716 loan repayments being missed every day and record write-offs, you might think that lenders had learnt their lesson.'

The British Bankers' Association last week announced changes to the Banking Code that include a commitment to 'responsible lending-It also promised more help for consumers who fall into financial difficulties (see Page 64).

Following the changes, which took effect from March 31, all lenders will have to carry out a compulsory check with a credit reference agency when consumers apply for credit.

They will also have to check either the applicant's income and financial commitments, or how they have handled their finances in the past or carry out a credit scoring process.

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