A brief guide to personal loans

August 19th, 2008

One result of the tightening credit conditions over the past year has been a proliferation of more complicated loan options with a wider variety of packages and repayment options available to consumers. It is a sensible time, therefore, to review the personal loan market.

Firstly, personal loans are available with various lengths of terms and repayment options depending on your personal financial situation, your credit history and the amount of money you wish to borrow. In the UK, borrowers can choose either a secured personal loan or an unsecured personal loan.

Getting a secured personal loan is a straightforward process once you have property you can use as surety against the loan. This means you use your property as collateral and if you default on the loan, the lender can take this property and sell it to redeem the money you borrowed. If you use your home as collateral, you still live there as you normally do and once the loan is paid in full, the lender has no claim on the property whatsoever.

An unsecured personal loan is one in which you do not have to use any of your property as collateral. Getting this type of loan does not take a long period of time because there are no appraisals needed nor are there any legal documents to sign except for the ones from the lender. You don’t need a solicitor for this type of loan.

These loans are the perfect solution for tenants and those who do not own property to obtain a loan for their personal needs. There is a greater risk for the lender in approving unsecured personal loans so the interest rates are therefore higher. If you should default on the loan, the lender has no security to fall back on to redeem the money you borrowed.

Even those with a bad credit history can apply for a personal loan and when you make your payments on time, you can get started on repairing your damaged credit. You will likely have a higher interest rate attached to the loan than a person with excellent credit would, but you can still get either a secured or unsecured personal loan.

If you are looking for such a loan to combine your debts into one lower monthly payment, lenders look kindly on this move and are more than willing to help you.

With the ease of the Internet and many lenders having an online presence, it is easier than ever before to search for an affordable personal loan online. You can do this from the comfort of your home at any time of the day or night. Browsing the various sites and experimenting with the free loan calculators that the lenders have available won’t cost you any money and you don’t have to submit an application to get the information you need. Therefore searching for a loan in this manner will not have any effect on your credit rating.

You have the option of requesting free quotes from several lenders and receiving relies by email, so you won’t have to speak to a loans officer. There are also experienced brokers for personal loans that you can use and they have an online presence as well. This eliminates having to take time off work to visit several lenders for information. A broker offers your loan to multiple lenders and then brings the results back to you. You choose the loan agreement that best suits your needs and then you submit an application.

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When is debt problem debt?

August 16th, 2008

Anyone who spends more than a quarter of their salary repaying loans is on the threshold of becoming over-indebted, according to guidelines issued by the Department of Business, Enterprise and Regulatory Reform.

And yet the proportion of people spending almost a third of their monthly income on unsecured loan repayments in the UK has doubled over the past year.

Figures from credit reference agency Callcredit show that 14% of the public are spending over 30% of their income on these repayments and the number of people spending over half of their monthly income on unsecured debts increased from 2% last year to 6% today.

The findings may suggest consumers are becoming more frugal in the wake of the credit crunch and are keen to cut down on their debts with unsecured loans becoming more difficult to find and credit card interest spiralling.

Consumers do not appear optimistic about their financial future with 43% of individuals believing that their current situation is going to worsen over the next 12 months, compared to 24% who think it will improve.

As heating and lighting costs are set to soar over the next year following recent prices from British Gas and EDF, the older age groups appear far more pessimistic than younger generations with 54% of all those aged over 55 years believing that their situation will not improve over the coming year.

Another survey by Yorkshire Bank suggets people are spending less and partaking in the ‘saving now, buying later’ ethic. It found that 73% of people surveyed agree that they are more careful now with their money compared to 12 months ago.

The increasing proportional spend on unsecured debt paints a concerning picture of consumer finances within the UK and this level of debt servicing would appear to be unsustainable.

With many people unable to see any light at the end of their financial tunnel, there is a perception that worse is still to come. The best advice to any individual who is struggling with debt repayments is to speak with their lenders now before things become unmanageable later.

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Global banks bolster profits by raising rates in the UK

August 13th, 2008

British Banks, the target of so much respect and affection from this blog, have been criticised this week after revealing that despite the global credit crisis they have made £500 million more from British consumers this year than last year.

Despite making heavy losses in other markets gloabl banks have been able to mitigate this by raising rates in the UK. The figures from the banks’ half-year reports show that HSBC, Lloyds TSB, Royal Bank of Scotland, Barclays and HBOS made combined profits of £4.294 billion in 2008, compared to £3.808 billion in 2007.

HSBC’s UK profits soared by 85 per cent from £331 million in the first half of last year to £614 million this year. Royal Bank of Scotland has increased its profits from its UK business by 9.2 per cent. And yet the global company announced one of the biggest losses in banking history of £691 million just last week.

Banks freely admit that they are chasing margin rather than market share since the credit crunch hit, which is making mainstream mortgages profitable again. Before the onset of the credit crunch lenders complained that it was increasingly difficult to make a profit on mortgages because of the cut-throat competition which meant they had to slash rates to attract business. Now lenders are in the driving seat and able to improve margins and profits while borrowers struggle to adjust to higher rates.

Mortgage borrowers are not the only bank customers to be affected by banks increasing their margins. Those with accounts, credit cards and loans are also facing higher charges. Research shows that it costs a borrower almost £700 extra to take an average loan of £5,000 compared to six months ago, assuming they repay over five years. A three-year loan over three years costs an extra £239.51 compared to six months ago.

It is also a miserable time for credit card holders as soaring rates mean it now costs £60 more to spend £1,000 on the average credit card compared to six months ago. This is because the average credit card interest rate has hit 17.4 per cent up from 16.8 per cent since February this year.

Current account customers have also lost out, being hit with punitive interest charges on authorized overdrafts – an extra 0.36 per cent compared to six months ago on average.

RBS admitted that it is making more money from mortgages, saying: “We saw the opportunity of the first half of this year to write good quality mortgages and improve market share at attractive margins.”

I have had to hold back in my usual contempt for banks in this case. The mortgage market here in the UK was distorted beyond recognition before the crunch hit and higher prices are necessary to effect the correction.

However, I am under no illusions that the banks are following this course of action to bolster their own profits and not the UK economy. I shall follow this story with interest over the coming months and try to spot the exact point when sound financial management on the part of the banks becomes profiteering.

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