Leading banks and lenders have been using controversial PPI premiums to subsidise cheap loans and , a survey has revealed.

A study from the Centre for Competition Policy at the University of East Anglia (UEA) found that the banks that were offering loans and other forms of credit with the lowest advertised APR typically had the highest mark-up on their payment protection insurance (PPI) products.

The study found that PPI from some lenders represented as much as 16.9% of the total loan value whilst some PPI policies added almost £50 to the monthly loan repayment.

PPI, which is a form of insurance that promises to cover debt repayments for a period of one year should a borrower find themselves unable to meet payments due to redundancy or illness, has been at the centre of a series of investigations by the Financial Services Authority other accusations of mis-selling. To date, the investigations have led to a number of major lenders being fined for breaches of FSA regulations, including Egg, Alliance & Leicester (now part of Santander), GE Capital (who supply credit/store cards for brands including ASDA, Comet, Debenhams and Topshop) and Capital One.

Restrictions on the sale of PPI will come into force in October 2010 that will prevent lenders from attempting to sell PPI at the same time as a loan or credit card application, a decision currently being challenged by Barclays with the support of other banks, including the state-owned Lloyds Banking Group.

Researchers looked at 211 personal loan and PPI policies at high street banks from January 1998 to December 2007, basing the data on an unsecured personal loan of £5,000. It found that on a £5,000 loan, the average monthly repayment cost increased from £162.37 to £186.75 when PPI was added.

However, the survey also found that since January 1998, whilst the average monthly repayment of a £5,000 loan has fallen by around 8.56%, the average cost of PPI premiums has fallen by just 2.95% over the same period.

The survey also examined individual lenders to assess how much PPI consisted of a total loan cost, with Capital One the worst of the bunch, with PPI making up a massive 16.9% of the total loan cost.

Britannia Building Society saw PPI costs at 16.2% and loans from the Bank of Scotland were 16% PPI.

At the other end of the spectrum, Coventry's PPI cost 8.2 per cent of a loan, Saffron was at 9.1 per cent and Bank of Ireland was at 9.6 per cent.

Monthly costs of PPI varied between lenders, with the lowest surveyed found to be charging £8.27 a month whilst at the other end of the scale; others were charging as much as £49.58 per month for the insurance alone.

Dr John Ashton, a UEA lecturer in banking and regulation, explained: “It is surprising to see such a high level of variability in the costs of payment protection insurance. Clearly some firms are exploiting customers far more than others,” said Dr Ashton.

“The de-regulation of financial services and subsequent joint provision of insurance and banking services has had some adverse results for consumers."