Pros and cons of a subdued lending market

October 30th, 2010

The major lending banks and institutions in the UK are witnessing a continued slow-down of the market for both secured and unsecured loans. This is being blamed on continued economic uncertainty and the prospect of rising unemployment.

The downward trend in the number of mortgage approvals for house purchases continued in September, the British Bankers’ Association (BBA) said. There was also little appetite for new personal loans among consumers.

The number of mortgages approved for house purchases fell slightly compared with the previous month to 31,104, as low demand for new loans continued. This was below the average of the previous six months, the BBA said.

The average value of these approved loans was £142,900, which was some £5,100 lower than the average of the previous six months but 4.1% higher than a year ago. Net mortgage lending by the major banks, which strips out redemptions and repayments, stood at £1.6bn in Setember, down on the previous month’s total of £2.5bn and the lowest figure since October 2000.

This reluctance to borrow is also seen in the BBA’s figures for unsecured credit. Repayment of credit card debt is narrowly outstripping the amount of new borrowing. The only reason that credit card borrowing in total rose slightly in September was because of the build-up of interest on existing debts.

Demand for personal loans – often used to buy big ticket items such as cars or for major home improvements – also continued to dip. New borrowing via these loans was 7% lower in September than a year earlier.

People may not be renovating their properties, but there is little suggestion that they want to buy a new home.

Most recent house price surveys show that prices have reached a plateau as fewer buyers enter the market and the number of sellers goes up. One mortgage broker suggested that banks were still being conservative when it came to handing out mortgages.

That large lending institutions are being so very cautious when it comes to lending is, from a macro-economic perspective, very worrying. When the economy is in such a chilly state credit is one of the ways that personal spending and business investment can warm it up again.

However, on the other hand, the other side of this coin is very encouraging. That demand for loans is still subdued suggests that the UK population has finally come to its sense after the credit fuelled delirium of the past thirteen years. This means lessons have been learnt and for that we can all be thankful.

Posted in Personal Loans | No Comments »

Consumers to be protected against excessive rates of card interest

October 21st, 2010

The Government’s review of consumer borrowing is going to consider putting a cap on the interest charged on credit and store cards to protect vulnerable consumers from being exploited and falling into spirals of debt.

The review is currently consulting experts on how to make the application of consumer credit fairer without unduly impeding the mechanisms of the free market. This includes discussion on whether the regulator will be able to put a limit on high interest rates charged to those who might have difficulty repaying.

The review, which will also look into the perennial problem of bank charges, covered ad nauseum on this blog, will form the basis of government proposals on changes to the industry due to be published next year.

The review is a combined effort of both the Treasury and Department for Business to find out how people can better manage borrowing, and improve the help available for those who get into difficulty.

The main areas the review will investigate are the aforementioned bank charge, a proposed seven day cooling off period when store cards can be returned without incurring any charges and a possible cap on the rates credit and store cards can charge.

The Consumer Minister, Ed Davey, said: “I want to encourage both customers and lenders to take responsible decisions and to strengthen protection where necessary, particularly for the most vulnerable. If things go wrong people face a confusing array of debt remedies, so I also want to examine how the existing insolvency regime can be made to work better.”

Since the credit crunch in late 2007, banks have been writing off about 10% of all money spent on credit cards because people have been unable to repay. This has pushed up credit card costs for everyone even though the Bank rate has been at a record low.

In June the Office of Fair Trading (OFT) decided against recommending interest rate caps on short-term borrowing such as pawnbroking, payday loans and home credit on the ground that imposing formal price controls would not only be very complex and difficult, but might be against the interests of potential borrowers since those loans fill a gap in the market for people who could not borrow elsewhere.

For a Conservative government to consider implementing some form of pricing control shows that they take the issue of consumer protection in the credit market seriously. However, it remains to be seen whether the deep pockets of lobbying firms manage to water down the proposals or the new government can stand up for itself in a way that the last one never managed.

Posted in Personal Loans | No Comments »

Consumers finally protected on PPI

October 14th, 2010

The Competition Commission has ruled, eventually, that banks will no longer be able to sell payment protection insurance policies when granting loans to customers.

This “point of sale” ban was first proposed last year after a long investigation and enthusiastically supported by this blog, but was then held up by a challenge by Barclays bank. This petty tantrum by one of the worst offenders is now over.

Lenders will now have to wait seven days before offering PPI to their customers in a move reminiscent of the US laws governing the sale of guns.

The Competition Commission has acknowledged that the sale restriction would inconvenience some customers who wanted the insurance but it stated that customers would be much better off overall.

The restriction covers the sale of all forms of PPI e.g. alongside credit cards, mortgages and bank loans but with the single exception of credit given to people who buy items through home catalogues.

No date has been set for the implementation of the policy and the change will probably take another year to come into effect, once the commission has made its formal order.

PPI has become highly controversial after years of campaigning by consumer groups against the widespread mis-selling of the policies.

Banks and other lenders were accused of foisting the insurance on millions of people, even if they could not make a claim under the terms of the policies, did not know what they were buying, or had been told improperly that buying the insurance was a requirement of being offered a loan in the first place.

Various official bodies such as the Office of Fair Trading (OFT), Competition Commission and the Financial Services Authority (FSA), have been taking an increasingly critical view of PPI sales, which are now the biggest source of complaint to the Financial Ombudsman Service (FOS).

Last week, the UK’s banks announced that they were taking legal action to thwart forthcoming FSA rules that would force them to re-open previously dismissed claims and pay compensation that might total as much as £2.7bn to 2.75 million people.

The FSA has so far taken action against 24 firms for mis-selling PPI and has already halted the sale of the policies alongside unsecured personal loans where a one-off upfront premium was involved.

After the debacle of the High Court judgement in favour of the banks with regards to overdraft charges it is good to see the FSA coming down in favour of consumers for a change.

Posted in Personal Loans | No Comments »

« Older Entries