The cost of loan and credit card insurance can be higher than interest payments on the debt, the Competition Commission said yesterday.

In a consultation document published as part of its investigation into the payment protection insurance (PPI) market, the commission said: “The evidence we have seen suggests that the cost of PPI is in some instances higher than the interest paid on loans.”

It also said it was investigating whether lenders were able to drive down interest rates on loans or credit cards because they made high margins on PPI. The commission found that the average interest rate on a £7,500 loan would rise from 7.8 per cent to 18.8 per cent if PPI premiums were included.

PPI is intended to cover borrowers’ monthly repayments on mortgages, store cards, credit cards, overdrafts and personal loans if they fall ill or are made redundant. But many debt experts have branded it expensive and inflexible. In addition, there are widespread concerns that some of the 20 million policies may have been mis-sold.

The Competition Commission’s report came as the Citizens Advice Bureau accused the Office of Fair Trading of being “asleep on the job” and called on the regulator and businesses to do more to stop soaring levels of personal debt in the UK.

Teresa Perchard, director of public policy at CAB, said: “Time and time again we come across people in desperate states who need not be there if the firm who lent them the money had acted responsibly from day one. While some regulators have taken action on scandals like the mis-selling of PPI others seem to be asleep on the job.” A CAB spokesman for CAB said the criticism was levelled at the OFT in particular.

LV charges £1,200 in PPI on a £5,000 personal loan repaid over 3 years, according to Moneyfacts, the financial information provider. But a standalone policy to cover the same amount from paymentcare.co.uk costs just £325.

Figures from PPI underwriters show that they received around £4.4 billion in premiums last year.

The OFT referred PPI to the Competition Commission in February, after receiving a super-complaint from the CAB in 2005.

Earlier this year the Financial Services Authority (FSA) fined GE Capital Bank £610,000 for failings in its sales of PPI. Eight months later, the regulator said there were still “serious failures” in the way banks and building societies were selling the insurance.

PPI does not usually cover those who are self-employed or have a pre-existing medical condition. Yet many borrowers in this category are still sold the insurance. In other instances, borrowers are led to believe that they their loan application will not be accepted if they do not sign up for PPI.

Record numbers of people are now reclaiming PPI payments from their lenders, claiming they were mis-sold. More than 100,000 template letters for claiming PPI premium refunds have been downloaded from Moneysavingexpert.com, and the Financial Ombudsman said that complaints about PPI mis-selling have doubled since last year. It is upholding about 60 per cent of complaints - a higher percentage than in any other financial area.

The Competition Commission is due to publish its findings next May.