All About Loans Weblog

New figures show that the number of people declared insolvent is still going down. This is despite all the new fees banks have been introducing to try and rake back profit lost from repaid overdraft fees. And despite the raising of interest rates on loans and mortgages which have made it increasingly difficult to pay back loans. For the last six months the number of people declared insolvent has been decreasing, according to Government figures.

Although the drop in insolvencies was not expected by the experts they are still warning that the worst may still be yet to come.

Britons borrow money like no other country in Europe and while this is good for retailers, the existing mountain of debt as well as the recent interest rates rises means more and more of us could still be at risk of insolvency.

Currently in Britain it is estimated that 8.2 million adults are in serious debt while a further 2.1 million of us are struggling with repayments. So if you ever feel like you’re the only one suffering there is no need to feel alone. Do not be scared to approach your lender for advice if you feel your debt is getting out of control. Early action is the best way of avoiding a difficult financial situation in the future.

18% of adults in the UK own more than £10 thousand in unsecured debt, such as car loans, credit cards and hire purchase. That is equivalent to 8.2 million adults and the number is only going up. Men were at more risk of building up large debt with 18% of men reporting debt of £10k compared with 15% of women.

Northern Rock the bank now most famous for having created the only run on a bank in over a hundred years and was bailed out by the Bank of England has now been accused of refusing to return the favour to some of its struggling customers.

Ron Hutcheon a solicitor from Liverpool and a partner at his company are currently defending actions brought by Northern Rock to the court against two borrowers from the bank. Mr Hutcheon believes that the case could lead to a landmark ruling over how banks treat borrowers who are finding it difficult to repay their debt.

Mr Hutcheon’s clients were both finding it increasingly difficult to pay off unsecured loans that they had taken out from the bank and a number of other lenders. On the advice of their insolvency expert both borrowers decided to take out an individual voluntary arrangement (IVA). This means that the lender agrees to write off a proportion of the debt while the borrower agrees to make monthly repayments for the next five years.

However before an IVA can be agreed to the majority lender, in this case Northern Rock has to agree to the arrangement. While all other lenders involved in the case agreed to the terms of the IVA, Northern Rock has refused to do so.

Northern Rock decided instead to take court action against the two lenders and obtaining a charging order against them. A charging loan means that the debt now becomes secured against the value of their property. If they fail to make repayments than both borrowers risk losing their homes.

The lawyers for the two borrowers have found that it seems to be common practice for Northern Rock to reject IVAs. If the court rules against Northern Rock than the bank may be forced to agree to IVAs in the future.

Mr Hutcheon is confident that his clients have a strong case and if they win there could be many more cases like the one currently in the courts coming forward in the future. Northern Rock however denies that the automatically reject IVAs. Rather they claim that the bank looks at each case by its individual merits.

A report shows that at the end of June around 125,100 mortgages were running behind in their monthly repayments, and it is estimated that this number will increase as many Britons are set to come off fixed-rate cheap loan deals.  Figures from the Council of Mortgage Lenders show that around 14,000 properties have been taken into possession in the first six months of this year, which is 18 percent higher than the six months leading up to it.  The number of repossessions is set to increase as many homeowners will be hit hard with the interest rate increases once they come off their current rate over the next few months, with some jumping as high as 2%.

The increase in home repossessions is believed to be caused by a number of factors, interest rate is one cause as the interest rates have become higher than many were expecting placing many homeowners at risk of being unable to afford their monthly repayments.  Another factor is the risks of bad credit loan lending that many are falling into and finding that they are unable to keep up with the monthly payments.

Although the number of repossessions are high, the vast majority of mortgage borrowers are coping with the interest rate rises and are stretching the budgets to meet the monthly payments on their mortgages.  If you find that you are struggling with your monthly home loan payments, then you should consider talking to your lender to see what options are available to you to keep your home from being repossessed.

Amid mounting reports focusing on the record number of bankruptcies filed in the first three months of 2007, there are reports supporting the Bank of England’s move to increase interest rates.  In fact, some reports state that the interest rate is not a chief factor in the overwhelming numbers of insolvencies.

Consumers who have taken out personal loans should not find their finances seriously affected by the 0.25 per cent interest rate increase this week, unless they failed to plan for the long term, according to a debt expert. In fact, there are many cheap loan deals available, as lenders are deliberately keeping rates low to counteract consumer caution.

“The interest rate increase should not have been a shock to borrowers,” says Abbi Rouse of loan brokers, Interfinancial Limited.  “Consumers should prepare for the unexpected when borrowing lump sums of money. Obviously no one expects to lose their job or be made redundant, but payment protection insurance is there as a safety net for borrowers.”

Stephen Rose, director of the Debt Advice Bureau, said that small interest rate rises “aren’t in themselves a reason for why there’s been such a rise in insolvencies.

“Rates would have to go a lot higher before that would filter through,” he said.

Homeowner concerns about meeting loan repayments are largely secondary to wider personal financial management issues, such as meeting mortgage payments and the steady rise of household expenses, like fuel and heating costs.

Simply by leaving a larger margin of error, customers can ensure they are “better insulated” from debt difficulties, according to Rose.

“If you want to guarantee nothing is going to go wrong – prepare for it,” Mr Rose added.

Otherwise, “the one day you don’t take the umbrella with you is the day it chucks it down”, he warned.

Insolvency Service figures show that 30,075 consumers went insolvent in England and Wales in the first quarter of 2007; 23.9 per cent more than one year previously.

The last decade has caused a lot of confusion and turmoil in the financial world. Economists are still trying to determine whether the last ten years made the economy stronger, or left a mess that will take another decade to clean up.

Conflicting sides are actively making predictions as Prime Minister Tony Blair prepares to leave Downing Street for the last time.

Some critics see the Blair legacy as a failure. Others see it as see it as a success that built wealth and attracted some of the world’s billionaires to settle in the UK.

Tony Blair retires with an accolade unlikely to be repeated in the next generation - a Labour Prime Minister who started and finished with surging rallies on London’s stock market.

In 1997, Mr Blair entered Downing Street with the FTSE-100 at 4,500. It soared to nearly 7,000, plunged 50% in the spring, 2003, and he leaves with it climbing towards 6,600, and speculation that it could reach 7000 by Christmas.

Individual Savings Accounts (ISAs) replaced PEPs in 1999 .  Millions of pounds are safely beyond the taxman’s grasp. Equity ISAs protected capital gains on shares and managed funds which jumped in value.

The Child Trust Fund spread wealth more widely. enabling families with spare cash to build four figure totals by the time grandchildren reach their 18th birthday from 2020 onwards.

Premium Bonds rose from £8.3bn  in 1997, to £36bn today.

Of course, there are record numbers of people defaulting on their loans and mortgages, which has driven the insolvency numbers to unimagined heights.   Critics have slammed the labour government as being one which encouraged the country to follow its example and borrow money. All in all, it was a time of turmoil, and a time of building. Only time will tell whether Blair’s vision was a good one for the UK.

Inflation fell in April from its ten-year high in March, according to government figures.  This is good news for mortgage holders who just experienced an interest rate hike, and fear another one as early as next month.

The Office for National Statistics said that inflation in April was 2.8 per cent, down from 3.1 per cent in March.

The Bank’s monetary policy committee voted to increase interest rates by a quarter of a per cent to 5.5 per cent this month, but today’s inflation figures may reduce the risk of more increases in either June or July.

The ONS says the largest factors that lowered  inflation was the falling of gas and electricity bills.

“There was also a large downward effect from financial services,” a statement said.

This year foreign exchange commission rates fell following the abolition of a charge from one major bank; last year, by contrast, average commission rates rose. In addition, fees for overdrafts fell this year but rose a year ago.

The largest factors increasing inflation are men and women’s clothing, restaurants, and cafes.

The retail price index (RPI), which includes mortgage interest payments, fell 0.3 percentage points to 4.5 per cent in April.  Many consider the RPI as a more accurate standard for measuring the countries economy.

Some economists are worried about the Bank of England’s attack on inflation and  its effects on society’s most vulnerable.  This has already been seen in the dramatic increase in bankruptcies this year.  Debt charities warn that insolvencies will increase every time the government increases interest rates, as consumers default on personal loans and mortgages they can no longer afford.

Many consumers are bitter that they were encouraged early last year to take out cheap loans and bigger mortgages but are now being punished with unmanageable repayments.

There have been calls for better regulation of the credit and debt solution industry based on research conducted by IVA.co.uk.

The release of the Department of Trade and Industry’s insolvency statistics for Q1 2007 spured the IVA.co.uk Debt presentation by Ipsos Mori.  This was followed by a discussion between a panel of experts and the audience.

The discussion focused on factors causing the increase in insolvencies.

Poor lending and borrowing practices were blamed for Britain’s debt crisis, with lenders keen to push cheap loans, and consumers reluctant to repay them. The research states that 43% of consumers consider this the key factor to behind the national debt crisis, while 32% consider irresponsible borrowing to be the key factor.

Consumers were asked to identify the main reasons people fall into debt. More than half the survey group identified poor money management as the main reason, with unemployment and ill health following.

The problem of a lack of faith in the debt solutions industry, and a strong call for regulation was als revealed. More than three quarters of those polled considered mis-selling in the industry to be common with one third listing it as common.

When asked about the possibility of further regulation in the debt solutions industry, over three quarters of respondents were in support of increased regulation for the loans and debt management industry.

The expert panel uniformly agreed that regulation is needed, but varied in their preference for statutory regulation.

However, other reports state that the IVA industry is causing much of the problem.  They force banks to drop part of the unsecured and secured loan debt, in return for the borrower not declaring bankruptcy on the entire debt.

There is a misconception when it comes to bankruptcy, in that many people feel that if they are unwilling to deal with their debts that they can file for bankruptcy.  However, bankruptcy is a way of dealing with your debts only after you have exhausted all your resources and you are truly no longer able to manage your debts.  Bankruptcy should not be taken lightly as it is a serious matter that will affect the way you are dealt with by any financial service for many years after you have been discharged.

In April 2004 the bankruptcy laws changed making it easier for people to declare themselves bankrupt.  It also reduced the time that it takes to discharge bankruptcy from three year to just one year or less.  This change was intended to help business people, however the effects of personal bankruptcy can be harder to deal with for private individuals.  If you are struggling with your debts, bankruptcy is not the only answer.  If you file for bankruptcy you can end up having to give up most of your belongings, salary and any investment in your house to pay off those debts.  Money that you come into whilst in bankruptcy can also be taken away and you could find yourself on the credit blacklist for up to fifteen years.

Many people blame the current debt mountain seen in the UK on the banks and credit lenders for offering easy cheap loans, but ultimately responsibility lies with those who borrow to ensure that they can repay.

Alternatives to bankruptcy include contacting your creditors directly to make an informal arrangement to pay back your debts and debt consolidation loans to lower repayments.  If however your debts have become uncontrollable and you have severe debt problems then you may want to consider an Individual Voluntary Arrangement (IVA).  An IVA is an agreement between you and your creditors that you will repay a percentage of the debt over a set period of time.  You should always explore your other options before settling for bankruptcy.

According to research by credit report provider CreditExpert, one in 10 adults have considered declaring insolvency or applying for an Individual Voluntary Arrangement. Many of these people are in debt because they made simple financial mistakes that were compounded by their overspending.

One of the most popular mistakes is taking out a credit card to pay off another credit card.  This is followed closely by one in 10 who have missed payments on credit cards, loans or mortgages. These are seen as small mistakes, but they can cost the consumer thousands of pounds in extra payments and overdraft fees as the years pass.

Other errors include using a consolidation loan, often an unsecured loan, with a high interest rate to clear existing debts. In many cases, this high interest loan is repaying low interest debts, increasing the amount the consumer will pay.  Also, the loan can extend a 2 year debt into a 5 year problem.  A debt that might be repaid in 2 years, with less paid in interest, is often extended over 5 years to decrease the monthly payments. Unfortunately, people end up paying more money in the long-run that they would have if they just stopped spending and repaid their original cheap loans.

Personal insolvencies reached 30,075 in the first quarter of 2007, up 24% on a year ago.

These included 6,842 bankruptcies, up 10%, and 13,233 IVAs, up 48%.

CreditExpert managing director Jim Hodgkins, said: ‘The number of people who admit to making basic financial mistakes and even considering ‘quick fix’ solutions like taking out an IVA is worrying.

‘What this research seems to expose is a serious lack of understanding of the long-term consequences of these actions and how it can affect your credit-rating – ultimately impacting your financial future.’

The government and even some debt management organisations are raising the alarm that the insolvency legislature needs to be updated.  The current regulations are too lax, allowing consumers the opportunity to build up high levels of debt and then claim bankruptcy when the debt burden becomes unbearable.

London’s status as a global financial centre will be in jeopardy unless the UK reforms its insolvency regime before the debt mountain causes the next economic downturn, according the European High Yield Association.

The EHYA represents institutional lenders.  They wrote the government arguing that the UK Insolvency Act (1986) is not up to the task of handling the complex restructurings that are expected to characterise the next downturn.

The UK remains a favoured venue in Europe for restructurings, but the lobby group says legislation has failed to keep up with market developments.

The banks and debt management companies worry that the current relaxed attitude toward bankruptcy will become an economic nightmare as more consumers opt to apply for bankruptcy and start over instead of taking responsibility for their current debts owed on secured and unsecured loans.

The record numbers of insolvencies in the last three months is expected to grow. Analysts predict that 2007 will see 150,000 and maybe a possible 200,000 bankruptcies and IVAs.

Some economic groups believe that tomorrow’s proposed interest rate hike, and another proposed interest rate hike as early as August, will drive many more people into insolvency.  The BoE hopes that the increased interest rates will lower the inflation rate and bring the current debt problem under control.