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I have once before mentioned the perils of so called ‘loan sharks’, although that was in the general terms available when other forms of credit were more plentiful. Now, with lending conditions worsening, government and debt charities alike a reissuing warnings to those who may be tempted to use extreme measures to secure credit.

The problem is that doorstep lenders and loan sharks are moving into the space left by Britain’s high street banks. The more banks tighten their terms for lending the more unofficial lenders rub their hands with glee.

Debt campaigners have seen hordes of clients forced to borrow at extortionate interest rates because they have had their credit cards cut off or have been refused loans as the country’s biggest banks react to the global liquidity crisis.

Banks have scrapped 125% mortgages, increased the minimum deposit needed for first-time mortgages and reduced credit card limits as the banks’ own borrowing costs rocketed in response to a worldwide collapse in inter-bank lending.

Last month Egg, the online lender, cancelled the credit cards of more than 160,000 customers. Many lenders, including Nationwide, Britain’s biggest building society, are charging higher rates for borrowers who do not have a 25 per cent deposit. At the same time, Provident Financial, the country’s most prominent doorstep lender, has predicted a booming 2008. The lender said this month that the number of people who fell into the ‘non-standard’ category of borrowers had grown to about ten million.

The Financial Services Authority (FSA) estimates that up to seven million people have difficulty gaining mainstream credit, and Citizens Advice reported last week that mortgage arrears problems had shot up by 35% in the first two months of 2008, compared with the same period last year. Citizens Advice bureaux said that they had dealt with 215,000 new debt problems in January and February.

Doorstep lending, which usually involves small loans on interest rates of 100 per cent or more, with payments collected each week by a local agent, is legitimate, but debt charities fear that unauthorised lenders are also capitalising on the increased number of people who have found their usual lines of credit diminished or cut off.

The problem with this type of lending is that for those desperate for money no rational and reasonable advice will dissuade them from taking any opportunity available to get the cash into their hands as quickly as possible, no matter what the consequences. Awareness of the problem coupled with sensible legislation from government and support links from charities is the best way to deal with those who have got themselves into serious difficulties. If you have fallen victim to an extortionate lender, either legitimate or illegitimate, contact the Citizens Advice Bureau immediately.

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I have spent a considerable amount of time giving various savings tips here recently and most of these have revolved around either minimising spending or borrowing sensibly to ensure that you get the best deals. I have only very briefly touched upon the subject of banking so I shall explore this further here.

It is interesting to note that only nine of the 64 ‘Best Buy’ savings accounts, loans and credit cards picked by the Which? Money team so far this year have come from the UK’s big five banking groups.

Yet Barclays, HBOS, HSBC, Lloyds TSB and RBS/NatWest continue to control the day-to-day finances of a huge proportion of the population. Data from market researchers Mintel shows that 65% of the UK’s credit cards are run by the big five, and they also manage 53% of savings accounts, 50 % of personal loans and 45% of Isas.

The big five banks control 79% of UK current accounts, yet pay the bulk of their customers a measly 0.1% credit interest compared with the market average of 1.78%. They also tend to have higher-than-average interest rates on their overdrafts, both authorised and unauthorised. If you keep funds in your current account or go overdrawn each month, switching from one of the main banks is a good idea. The current market ‘Best Buys’ are Cahoot (3.65% credit interest) and Intelligence Finance (2.75%). If you keep an average balance of £1,500 in your current account, you could be £53 a year better off with Cahoot (paying 3.65%) than with one of the big five banks paying 0.1 per cent interest.

Several current accounts offered by the big five banks do offer attractive levels of credit interest, but these stipulate that a minimum amount must be paid into the account each month. Two examples are the Halifax High Interest account and the Lloyds TSB Classic Plus account, which have credit interest rates of 6.17% and 4.25% respectively. However, to get these rates you will need to pay in at least £1,000 a month.

If you have money in an easy-access savings account with one of the big five bank groups, you are simply not getting the best out of your savings. The Best Buy accounts offer much higher interest rates, even if you have only a relatively small amount to save.

The big banks do offer slightly higher than average interest rates on savings than the market as a whole. For instance, the average rate on a deposit of £10,000 was 4.21% among the big five banks, which is 0.17% above average for the market as a whole. But this still leaves the major providers a long way behind the Best Buys, with ICICI Bank (6.41%) and Bradford & Bingley (6.40%) offering far better rates.

More than a quarter of the UK adult population (13m people) currently has a cash Isa. That number is likely to rise further over the next few months as the maximum amount you can invest in these tax-free accounts each year is rising next month to £3,600 (previously £3,000).

The big five banking groups offer significantly lower-than-average rates for Isa holdings of £3,000, and slightly lower rates if you have a balance of £18,000 or more.
If you want the best rates, you should switch from the big banks to a building society. The Scarborough BS currently offers the best rate in the market for balances of both £3,000 and £18,000 (6.30%), followed by Icesave and Loughborough BS (which both offer 6.10%).

It would be easier to understand why consumers stick with the big banks if they got good customer service, but all the research suggests that they often don’t. Of the 17 current account providers surveyed recently, the only `big five’ banks to appear in the top ten were RBS and Halifax. The rest filled places 12 to 16.

Banking is one area of personal finance where customers seem very reluctant to shop around to find the best deal. This should change, as not only would customers then be making the most out of their money but it would force the complacent big five to finally improve and even possibly compete on the deals they offer and the customer service they provide.