Personal Loans UK: A Happy New Year?

December 27th, 2007

Do we look forward to 2008 with hope or trepidation? There are threats on the horizon but how likely they are to be realised, and how severe they will be if they are remains to be seen. A brief analysis will help dispel the myths and allow clear judgements to be made as we ride into the new year.

The property market is one of the key factors in the economic health of the nation. Unfortunately, every sector of it has shown itself to be heading for a downturn. The UK housing market has been regarded as something of a bubble, with a raft of high-profile economic bodies rating the UK property market as over-priced in the region of between 10% and 30%. Commercial property has already been hit by a slump and faces continued declines. Similarly the collapse of the sub-prime buy to let market and a fall in tenant demand for flats means that the short-term outlook looks very unfavourable for many buy-to-let property investors.

Inflationary pressures remain strong, continuing to put pressure on the Bank of England. While they rode out above-target inflation for almost a year over 2006-2007, we may find the bank in a similar predicament over 2008. As warned in August food prices have also seen a dramatic rise in price over this year, and the situation hasn’t improved as the movement from agricultural production for food gives way to agricultural production for biofuels. Rising food costs means less consumer spending in other areas, which has a knock on effect on retail sales, reducing company profits, and therefore pushing share prices downwards in key areas. Recent moves by the Bank of England cutting interest rates to stimulate the financial markets has had an ugly inflationary effect. Cutting the lending rate helps devalue the pound, and reduction in the value of the pound to the dollar increases the price of commodities in real terms, further compounding inflationary issues.

Britain continues to hold the highest amount of personal debt of any European country, accounting for one third of all European debt. With nearly 2 million households currently moving from low interest fixed-term mortgages and now being hit by higher variable mortgage rates, it leaves consumer spending and debt issues very sensitive to further adverse changes in economic conditions. Over the course of the economic boom we’ve enjoyed over the past 10 years, rather than save, the UK government has accrued increasing national debt. The figure now stands at a £20 billion deficit, almost 5% of GDP. One can only fear what will happen as adverse economic conditions impact, and the cuts the government will need to apply to stop this debt spiralling out of control. Of course, it also needs remembering that the UK government is currently funding Northern Rock to the tune of nearly £30 billion as well…

The Credit Crunch has rocked financial markets, but we’ve only seen the opening salvo on what continues to be seen as an unparallel event in financial history. The main impact has been a tightening on lending, with mortgage lending already in decline. Products in the mortgage and personal loans UK market associated with increased risk are being offered on a far more restrictive basis. Until all balance sheets clearly demonstrate where the bad debt from the US mortgage crises is held, investor uncertainly will remain. Estimates suggest as much as $300 billion in mortgage defaults will hit the credit market. The serious problem is that as much of this was used to leverage larger investment, so $300 billion could have been used to secure as much as 100 times that amount. This is why it is not over stating the problem to say that we’ve not seen any comparable economic situation since the 19th century.

In the face of the above, it’s obviously that the economic wheel is turning full cycle, and that potentially very adverse conditions face us, not just through 2007, but also in the years that follow. Recession is a potential reality, but even worse is that is the possibility of stagflation, which would see the economic wheel stall. The problem is that each of the above covered conditions invites further economic woe, helping to feed further corrective economic processes that will bite hard. It’s easy to take a “gloom and doom” approach to financial forecasting, but so far various other economic factors have helped provide a robustness and stability to the overall situation – but those factors will increasingly erode.

The simple fact is that economic cycles are entirely natural and healthy aspects of growing economies. However, the seriousness of the current situation is underlined by the extended boom period, and serious flaws at the very foundations of the international financial markets. While these issues may be beyond the control of the ordinary person, the one thing we can all do now is take proper responsibility for our own micro-economic situation within a worsening macro-economic situation. If ever there was a time for proper management of personal finances it is now – because the summer of plenty is ending, and the cold winds of an economic winter of discontent are blowing. It’s time to wrap up warm.

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So, You made it through Christmas

December 27th, 2007

So Christmas is over. Santa has been and gone, the mountains of food have disappeared and soon the decorations will be coming down again. The festivities may be over, however, the paying for them is definitely not. More people than ever took out short term loans in December this year and loan providers in the UK are expecting a large upsurge in demand in January as people try to consolidate their debts.

Neil Munroe, external affairs director of Equifax, said: ‘There’s a common trend that people do borrow short-term over Christmas and try to consolidate that in the New Year, so there’s always an increase in loan applications and mortgage applications. At the moment the general view is that if they are in the marginal area, so if their credit score is only marginally acceptable for lenders, they may find it more difficult.’

More difficult, of course, means more expensive. Although there is no doubt that attempts to clear those debts are the best possible move consumers can make. Sensible consolidation can lower the cost of borrowing which is a wise move if short term, high interest loans have been used to make it through December. Attempts to ignore the issue until later in the year will mean debts building up and quite possibly becoming insurmountable.

The present situation in the UK financial markets may make it difficult for those who have a less than acceptable credit score. The strict loan conditions set by mainstream lenders may almost drive out entirely the borrowers with an extremely bad credit rating. However, as I have been detailing on this blog for the past months there are always acceptable options to be explored before high interest niche lenders need be approached.

Independent debt counsellors are a particularly good idea at this time of year, especially if consumers feel that their debts are becoming unmanageable. They can also be used by those whose debts, although not out of control, could do with more efficient supervision. I shall repeat what I have said before that ‘loan sharks,’ the unofficial lenders that use very high rates, should never be used no matter what the circumstances.

There are always those who are willing to offer good advice after the event. But since it is good advice I will include it here. Susan Hannums, savings manager for AWD Chase de Vere said that interest rates on debt will be higher than the annual interest rates on people’s savings. Hannums said: ‘If you can afford to put a little bit aside like, say, for forward planning for Christmas, it doesn’t hurt – even if it’s just ten, twenty pounds. It all helps for next year, and obviously it will stop you from needing to get into debt next year.’

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Don’t worry, 2.6 million % is ‘competitive’

December 21st, 2007

About a month ago I wrote on this blog about payday loans and how, while they do provide a much needed service, companies can take advantage of consumers. And so they are. The BBC has reported today of a woman in York who paid 2.6 million % on a payday loan she took out for one week.

The woman took out a one week loan for £320 with the firm Early Pay Day Loans, which attracted £80 in interest over the seven-day period. ‘The charges came to light after the borrower, who wants to remain anonymous, approached York Credit Union for help with a number of debts, including the Early Pay Day Loans deal.’

When the cost of the credit was calculated over a 12-month period, the annual percentage rate (APR) worked out at 2,639,385.9%. Early Pay Day Loans insists that its charges are “competitive”.

Because of the way they are structured, short-term loans almost always have significantly higher APRs than traditional deals, where the money is paid back over a much longer period. Lenders argue such interest rates reflect the fact that many customers who take out these loans are considered to be high risk. A debate is now beginning to grow about where the line lies between companies protecting their exposure and customers being systematically ripped off.

‘York Credit Union Manager Mike Horncastle said he was astonished to see the figure in the loan paperwork. ‘I’ve never seen an APR that high,’ he said. ‘When we put her details into the computer, our software – which is designed to help credit unions analyse borrowers’ details – simply could not cope with the figure and wouldn’t process it. The computer assumed it was a mistake,’ he added.’

Dawn Hodson, a manager at Early Pay Day Loans, was quoted in the Metro newspaper defending the company’s policy. ‘The charges on our loans are competitive in the market, and we like to think we are responsible lenders,’ she was quoted as saying. I like to think of myself as many things but that does not make any of them true, and how Ms Hodson can claim that an interest rate higher than many professionals has ever seen is ‘competitive’ is beyond me.

The case is likely to reignite the controversial debate about whether there should be a cap on the amount of interest lenders can charge. The UK has not had an interest rate ceiling since the introduction of the 1974 Consumer Credit Act, but other European Union countries, such as France, Germany and Ireland, do limit interest rates.

Consumer groups and debt charities in the UK are split on whether a cap is a good idea. In 2004, the then Department of Trade and Industry (DTI) rejected calls to re-introduce a threshold arguing that it would make it more difficult for low-income consumers to get credit. While this is a good point it seems obvious that while the DTI has ensured customers can get credit it needs to go much further to ensure that when they do they are not ripped off.

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