Borrowers in the UK are being hit for a staggering £332 million per year by lenders for repaying their personal loans early, according to new report by Egg, the world’s largest pure online bank.

The report, which is published just as the DTI prepares to issue its policy recommendations on this area of consumer credit, also exposes the fact that consumers are being misled by the industry into thinking they have loans that attract no penalties.

• 1 in 9 Britons will be penalised for the early repayment of loans taken out last year.
• 4 out of 5 providers charge borrowers penalties for clearing their loans early.
• 70% of borrowers pay their loans off early - creating a £332 million penalty bill for 2002 alone.
• Borrowers are being misled by providers who fail to make them aware of charges – only 1 in 5 think they will be charged for early repayment.

As consumers and government demand greater fairness and transparency of financial products, Egg’s research clearly shows that the early redemption charging culture associated with unsecured personal loans has continued unabated. In fact, the situation for borrowers has arguably got worse over the past five years with some providers introducing new penalties on their loans.

Of the 61 providers listed in Moneyfacts offering unsecured personal loans, 48 (or 79%) have some form of early redemption penalty attached to the loan – typically in the form of an interest penalty of one to two months.

Only a handful of providers – including Egg – have no form of penalties whatsoever for early repayers.

The worst cases are providers, say Egg are those who have either increased their penalties or have recently introduced them. This includes the RBS, Lloyds TSB (as Lloyds Bank) and the Yorkshire Bank. All originally offered loans without penalties.

Now all of them charge 2 months interest for early redemption on a £5K loan. Lloyds TSB has also increased the interest rate it charges on this amount loan rate over this period (from 14.9% APR to 15.9% APR).

Egg’s consumer research also indicates a frightening lack of awareness about penalties, clearly indicating that consumers are not fully informed at point of sale. Of the 2,000 consumers with an unsecured personal loan questioned, only 20% believed that their loan had an early repayment penalty attached to it – a reverse of the reality.

Some three-quarters (74%) of UK loan customers would want to pay off their loan immediately if they unexpectedly found extra funding and only 29% would be happy remaining with their current loan provider if a cheaper loan was offered elsewhere.

However, two thirds (65%) of these consumers claimed that they would be put off either repaying their debt early or moving to a cheaper provider if it meant they were likely to be charged a redemption penalty for doing so.