Beware the Credit Crunch Grinch

December 19th, 2007

The credit crunch Grinch that has been stalking the financial markets of late could have a variety of consequences on Christmas this year. They are effecting different groups in different ways, including some unexpected benefits, but while the benefits are short term the rest of the consequences are long term and will linger long after Santa’s visit.

The first benefit is that fears over the credit crunch have led to consumers beginning their Christmas shopping later than usual. Retailers, fearing a disastrous end to the year, have responded with many deals and savings that would otherwise wait until January. ‘A survey by the Confederation of British Industry on Wednesday showed retail sales growth in the first half this month slowed to its weakest in more than a year and stores were their most pessimistic since April 2006 about sales next month.’

‘Furniture and household goods retailers, such as Carpetright , have been the first to take a hit from a rapidly cooling housing market. Clothing stores, like Next and Debenhams have also suffered as the rising cost of borrowing has eaten into peoples’ disposable incomes. But analysts reckon the timing of Christmas this year, it falls next Tuesday giving people a whole weekend to cram in any last-minute shopping, should help ensure the festive season isn’t a wash-out for stores.’

‘Not all retailers are suffering: department store chain John Lewis has boasted healthy year-on-year sales growth every week this month, while supermarkets have cashed in by selling homewares, clothing and electrical goods alongside food.’

This mixed bag is pretty much as good as it gets. And this good news for consumers is, however, very bad news for employers which means problems are beginning to store themselves up for next year. ‘The big question for policymakers and retailers is what happens after the Christmas decorations have come down and the bills start to pile up on peoples’ doormats?’

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The Perils of Lending to Friends or Family

December 19th, 2007

With the cost of loans from high street lenders rising during the current credit crunch more and more people are turning to their friends for loans. ‘People in the UK made loans to friends and family over the course of the last year that totalled £26 billion, according to a new study.’

‘Research carried out by PayPal found that some 29 million adults have lent relatives or friends cash during 2007 and are owed an average of £898.52 each.’ While the benefits of these arrangements can be either very low interest rates of even interest free loans, the obvious drawbacks should be taken into account.

Lending or borrowing from friends or family is a very good way to ensure that families will fall out and friendships break up. The very reasons that the loans seem so attractive in the first place can make them sources of tension. Lenders can feel they are being taken advantage of and borrowers that they are being unduly pressured.

Sure enough, ‘more than a quarter of people in the UK have loaned family members money, but 9.6 million lenders admit they have fallen out with relatives over the loans.’

‘Everyone will, I’m sure, have either borrowed or lent out money to friends and family, often on the spur of the moment, however as the study has shown these potentially small amounts of money can soon add up,” said Cristina Hoole from PayPal UK. On average we’re each owed almost £900 and with Christmas just round the corner perhaps we should be looking to call in some of those unpaid loans rather than relying on credit to see us through.’

There is little advice to offer those who see borrowing from friends or family as a good option. Some of them will experience no problems whatsoever, some will be putting friendships at risk and jeopardising relationships. Common sense and communication between the parties involved will minimise these risks but they will be present until the loan is repaid in full.

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The Story Continues…

December 15th, 2007

The row between lenders and the Citizens Advice Bureau I talked about in my last post has widened with a BBC investigation into irresponsible and aggressive lending. HSBC in particular had been singled out as ignoring a debt advice charity that acts as an intermediary, making aggressive phone calls and sending threatening letters.

‘The BBC’s Breakfast programme has discovered some customers who have an agreed debt repayment plan with a debt advice charity are being put under pressure to take out loans, sometimes at a higher interest rate than they are already paying. Banks say interest rate charges are up to them.’

Peter Tutton from CAB said, ‘We see a lot of cases of people coming in who have tried to talk to their banks about arranged payments and they haven’t been listened to, and they have been asked for more than they can afford. Typically people find that, even after they have been dealing with us, they have found that they have been continued to be written to. They get aggressive letters and phone calls from their lenders.’

The banks’ organisation, the British Bankers’ Association (BBA), said banks were happy to work with debt advice charities. However, it said they have to make their own judgement about the interest rate they charge and how much someone can afford. Eric Leenders from the BBA said, ‘The work that banks do with intermediaries like money advice trusts are essentially negotiations – they are not necessarily conclusive.’

There is an argument here that the banks are simply looking after their own profits, which is after all what businesses are supposed to do. There is a clear distinction, however, between profit and profiteering. While it is unrealistic to expect banks to act entirely philanthropically in society seeing them as plundering buccaneers preying on the weak is equally difficult.

This story has not yet run its course. If the BBC has evidence that HSBC has been in engaging in illegal practices the Financial Services Authority will presumably get involved, the BBA may be forced to admit that having banks use ‘their own judgement’ about how much profit to make from someone in debt problem is a clear conflict of interest. Watch this space.

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