All About Loans Weblog

Five consecutive interest rate rises over the past 12 months meant that households are now facing a record debt burden. Even now that the base rate has dropped by a quarter point, it will be a while before financial relief is felt by most UK households.

Recent research suggests that 19p out of every £1 earned by households goes towards repaying accumulated debt and the interest on that debt. Although this sounds grim, much of that debt is secured against property, rather than in unsecured loans and high interest credit.

The previous debt record was back in 1990 when debt accounted for 18p in every £1.  The burden of debt has been on the rise since 1997 when the figure was just 12p in a £1.

Even with the recent drop in base rate, the debt strain could get even worse by the end of the year. More and more of us could start to find it increasingly difficult to pay off our debt and more and more of our income goes towards servicing our debt. This is always true around Christmas and New Year when people spend beyond their income.

The reason we are feeling a real squeeze on our finances is not only because of increased borrowing but also because of modest earnings rises since 1997, rising utility bills, higher petrol prices and the increase in interest rates. All these things leave us with less real disposable income, but a sense of entitlement towards the ‘good things’ in life means that many families take out loans to finance holidays, cars and luxuries.

Despite the rising burden of debt (or maybe because of!) our spending has been rising also at an average rate of 5.5% per year since 1995. However growth in income has not been rising by as much and has only increased by 4.9%. The difference is made up be households borrowing more money.

If you are having trouble paying back your debt then there is always the option of discussing this with your creditors and coming to some sort of agreement. Early detection of financial difficulties is the best way of dealing with the situation. Debt consolidation loans offer a good way of re-financing at a lower rate over a different term and one monthly payment is easier to manage than several.

More and more young people are struggling to understand the basic of personal finance, according to new government research. This leaves them at risk of ruining their credit rating early on and jeopardising their ability to secure loans in the future.

A recent government poll recently suggested that a culture of secrecy seems to have developed among 16 to 21 year-olds who admitted that they would not tell their parents they were overdrawn and with 1 in 5 saying they wouldn’t even let their parents know that they had a credit card.

This lack of knowledge on young people’s side could be down to parents making money matters a taboo. Most parents admit that they do not feel comfortable discussing money matters with their children and 22% thought that their children did not consider money matters to be of any importance.

However it is not only young people with the knowledge gaps and if you don’t know how to manage your finances efficiently than you risk not making the best decisions with your money and getting into financial difficulties. If you have some extra money sitting in your current account why not put it in a saving account for instance? Also a lot of us don’t know when getting another credit card is not to solution to our financial woes and when taking out a debt consolidation loan is better than repaying the minimum on high-interest cards.

The DfES has a campaign called Talking Money which is aimed at encouraging families to be more open about their financial matters as the family is your best financial safety net.

There has been a lot of controversy in the last few months over the 40 year mortgage. Many people are opting for the longer term mortgage because it lowers the monthly loan repayments. However, few people calculate how little the ‘wrong’ 40 year mortgage will lower the payments.

It is possible for a mortgage to be arranged in such a way that the real discount is less than fifty-pounds difference. The problem comes when consumers do not shop around. They let the bank or mortgage broker compare their choice of 25 year mortgage against the 40 year loan.

There are hundreds of 25 year mortgages, with many varying a few pounds, to a couple hundred pounds, when borrowing the same capital.  The 40 year mortgages can vary as well.

The mortgage broker may be showing a difference of a couple hundred pounds, but the 25 year mortgage may be one the customer would never qualify for.

For example, a couple with a low risk mortgage, and 25% down, with the capital only four times their annual income will pay less for a mortgage than a young couple in a high risk, with 5% down, and who are borrowing six times their annual income.

However, a clever broker may compare the 25 year mortgage for the second couple against the 40 year mortgage of the first couple. The results will be very different than if the broker arranged a 25 and 40 year mortgage for the same couple.

The big sell for most 40 year mortgages is a lower monthly payment. The broker wants to show that there is a big difference in the monthly payments, but in reality, the difference is rarely more than one hundred pounds a month.

By knowing how to handle your personal finances you will be able to properly manage your money, increase your chances of obtaining credit, and open up possibilities to other financial successes.  One way to start is by checking your credit report.  By reviewing your credit report you will be able to view your personal credit history and see what loans, mortgages and cards you have taken out as well as the amount of your current outstanding debts.  Your credit report is important as it is what lenders look at before they decide to offer you a card or a cheap loan, so it is important that you ensure all the information on your credit report is accurate and that no fraud or suspicious activity is taking place.

You will want to look at the amount of your total outstanding debt.  If you find that you have several cards, one or two personal loans as well as a mortgage, not only will it be hard for you to keep track of the payments, but also lenders will see this on your report and may think that you have overstretched yourself and will turn you down for credit.  One way to resolve this is by consolidating your debt into one lump sum and making large monthly payments to pay off it off.  You will then want to cancel most of your credit cards to restrict your spending as well as reduce your debt, because although the outstanding balance on the credit card may be zero, lenders still see it as a way for you to get into debt.

Budgeting is one important factor when it comes to organising your personal finances.  By planning a budget you will be able to pay off your debts quicker and build on your assets.

The Financial Services Authority has been busy over the last year trying to make the financial industry play fair. In all incidences, it backfired on the very customers it was trying to protect:  The attack against illegal bank charges backfired. The attack against credit cards backfired seriously.

Now the FSA has slammed the sub-prime mortgage lenders.  Their new report accuses them of failing in their responsibility to vulnerable borrowers with high levels of debt.  This oxymoron has the financial community scratching their heads. The sub-prime, or bad debt, home loan exists to make it easier for vulnerable borrowers with high levels of debt to borrow when the ‘real’ lenders tell them they cannot afford to buy or keep their own home.

Sub-prime lenders offer loans to prospective homeowners with bad credit ratings or substantial debts, but they charge a hefty premium for this service. The FSA doesn’t believe this is necessary in a £30bn industry, whilst the sub-prime lenders insist that the higher premiums covers their risk when lending to borrowers with a history of defaulting.

Cutting this fee may backfire.  The US sub-prime market crashed because they found themselves in an unbalanced situation of fees not covering their losses. There is also the risk that it will become impossible for university graduates with hefty student loans to buy a home.

Almost 250,000 CCJs were issued in England and Wales in the first three months of 2007, an increase of 9.5% over the same period in 2006.

Lenders are “increasingly using the court route to deal with unsecured debts”, the Registry Trust said.

Experts say that the data is revealing trends in the households who are struggling financially.

The approximately 247, 000 CCJs issued in 2007, to retrieve consumer debt, reached the highest levels since the summer of 1997 when the total number of judgements issued was 296,841.

Most of the consumer CCJs, 70%, is directly linked to credit, according to an estimate by the Registry Trust, who collated the data.

This is causing many debtors to be upset. Debtors who do not comply with the terms of judgements are added to a CCJ register for six years, making it difficult to take out personal loans or mortgages.

“The dominant trend is upwards in consumer judgments and this quarter’s record numbers give a warning to unsecured borrowers that their credit ratings are at risk and further proceedings are only a step away,” said Malcolm Hurlston of the Registry Trust.

The economy improved through the 1990s.  The total number of judgments declined as lenders used alternative methods of collecting their debts.

Interest rates are expected to drive these numbers up in the next two quarters of 2007, as more consumers struggle with their debts.

The banks are expected to turn to the courts in the future as the first choice for debt collection.  They recorded record levels of bad debts for 2006, and are determined to protect their profit projections through 2007. Many economists blamethe current debt problem on lenders offering consumers cheap loans without fully checking credit records.

Students are taking a good look at the 30-something generation and worrying about their own future.  University once promised the fast track to a good life.  Now overwhelming university tuitions, high interest rates and the impact of immigration on available jobs has many students worrying.

A number of post-graduate students are dropping out of university in the hopes that they can secure a good job while staying out of debt.  Many students believe that the 10 – 15 years it takes to repay a university student loan, is equal to the pay inequity between a university job and a public sector job.

This is disturbing for government and economists.

Alan Mitchell, assistant director of CBI Scotland, said: “If we’re going to have a high-value economy, it’s people with postgraduate degrees who are going to fuel that.

“It’s time for an overhaul of the system. Education must be based on ability to learn, not pay.”

Science postgraduate enrollment fell from 3,650 to 3,490, while non-science courses decreased from 6,555 to 6,150.  These numbers do not compare to overseas numbers.  The number of overseas postgraduate students rose by 59 per cent over the same period.

Robin McAlpine, a spokesman Universities Scotland, said: “It should be a Scottish priority to get the volume of our people staying on for postgraduate study up to the UK level.”

Postgraduate students cannot apply for student loans, so they must work, or take out a personal loan to continue their studies. This puts undue hardship on the student, risking their credit rating, and forcing them to repay a loan whilst finishing their studies

A new type of fraudster is sapping many single adult’s life savings, and even driving them into insolvency.  These insidious fraudsters hit their victims from dating sites. They earn their victim’s confidence and learn whether they own a nice house, discover their mortgage level and whether they have a savings account.

A growing number of adults are victims of seemingly ‘caring’ people whose acting skills are so good that they quickly gain access to the victim’s accounts.  Reports are surfacing where con artists have stolen as much as £70,000, but usually target smaller amounts.

There are two types of con artists who use these scams.  The first type of fraudster often has a heart rending story; perhaps involving medical bills that cannot be met. They ask for financial help. Or perhaps they have a business idea which is a ’surefire winner’.  Each time the victim lends money to the fraudster – sometimes clearing their savings accounts, sometimes taking out personal loans to raise the cash. But once the money is handed over, the fraudster is never seen again.

The second type of fraudster dates the victim and then quickly moves in. They set up house and open joint accounts.  The fraudster can usually apply for a loan or open joint accounts on the victim’s credit rating. After a while they empty the victim’s accounts take gifts and disappear.

The first type of fraudsters are usually located in foreign countries, making it impossible to press charges.  For the second type, they could be masquerading under a false name, or a foreigner who expects money for a visa and airfare to the UK.

There are many different types of scams that separate UK adults from their money.  Many victims of fraud are left with no money, no way to repay their mortgages, and with only one option: insolvency.

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 high rates of personal insolvencies and high-profile debt suicides are pressuring banks to ensure they lend responsibly and have moved the government to open up restraints that limit the banks from sharing a client’s consumer credit information.

Credit Reference Agencies have operated in the US for over 50 years, and in the  UK for about three decades.

The three major agencies are Experian, Equifax and CallCredit. These companies maintain consumers credit information files.

Initially, they only held information on customers who failed to pay their debts.   Recently, they were given permission to include data on good account-holders.

Unfortunately, banks are reluctant to share details of good customers for fear of losing their loyalty, so they restricted data sharing to defaulters.  Unfortunately, this enables consumers to play one financial company against another, amassing more debts than they admit to having.

Alarming stories abound of customers building tens of thousands of pounds worth of personal debt. The general consensus is that if consumers cannot be trusted to borrow responsibly, then banks must take the position and protect consumers from themselves.

About 10 years ago, institutions introduced a clause into their standard terms seeking our permission to share our personal details with the agencies. Anyone who refused was refused a personal loan or account.  This has changed recently. Banks are so desperate for new clients that many are not looking into a consumer’s credit rating at all before issuing a loan.

Unfortunately, 40 million accounts were opened before banks asked permission. These customers were not asked if they wished their information to be disclosed to third parties for credit checking purposes.

These “non-consensual” accounts, and data relating to them cannot be shared. The government is moving to lift this blackout, and release everyone’s information to the Credit Reference Agencies so they can do their jobs more efficiently.