The Office of Fair Trading is threatening to prosecute lenders who coax borrowers by advertising the minimum annual percentage rate (APR) but omit the cost of compulsory payment protection insurance (PPI).
Lenders will face prosecution from this week if they fail to include the cost of PPI when they advertise an APR rate.
Under new OFT guidelines, advertising a minimum APR is only acceptable if a typical APR is also given. The latter should be more prominent.
The competition watchdog gave an example of a loan advertisement that offered a loan without PPI at an APR of 10.4 per cent, which balloons to 19.7% when the insurance cost is added.
Failure to comply may leave a company open to prosecution under the Consumer Credit Act.
Serious offenders face a maximum two years imprisonment.
High street bank Abbey National welcomed the move. Personal loans manager, Davinder Shergill said: "Tying credit protection insurance to a headline APR rate is a sleight of hand method of attracting customers.
"Also it does not give the customer an opportunity to shop around for a better deal."