All About Loans Weblog

In the wake of the credit crunch it would appear that many credit card companies are increasing their interest rates on all customers. Customers who have borrowed large amounts and always meet their monthly repayments appear to be at most risk of seeing their interest rates go up by as much as double.

It would appear that the worst credit card firms for increasing their interest rates in recent months are the American owned ones. MBNA and Capital One are now charging some of their borrowers as much as three times more than the typical rate they advertise.

Capital One has stated that it is increasing the rates for many of its customers due to the changes in market conditions. However many critics are accusing the card companies of profiteering from customers’ misery.

Other MBNA customers have reported that after seeing their interest rates more than double they complained. However while MBNA did reduce rates they did not bring it down by the amount they had increased it.

Many people are now deciding to dump their cards if they are being treated unfairly and move to another lender.

If you have a large balance than you are best transferring to a card with a 0% offer or a card that promises a low rate for life. This stands for all customers. If you can switch to a card that promises a low rate for life than you should. This may not be possible for those customers holding large balances, in which case a cheap loan is the best option. It may not offer you the prospect of further borrowing, but a loan cleared even at the lowest rate will still be cleared sooner than a card paid off by minimal amounts each month.

Mint is currently offering a card with 0% balance transfer till January 2009 which then reverts to a rate of 14.9% along with a 2.5% fee.

News in from the British Retail Consortium (BRC) suggests that customers are shunning plastic and turning back to good old cash.

A survey conducted last year showed that 60% of purchases were made by cash, compared with 54% in 2006. The figures released did not offer a break down by month or quarter, so we can only speculate that most of the upturn in cash spending occurred in the latter part of the year, once the credit crunch had started to hit.

However, even before the prospect of recession was spoken of, most financial experts agreed that consumers were slowing turning away from credit cards and personal loans to fund their spending.  When the sub-prime lending crisis hit America, consumers were already getting twitchy about the ‘culture of lending’ headlines popular in the news and starting to review their desire for easy credit.

Many customers are still very happy to take out a loan for a holiday, new car or even just a spending spree, but lenders agree that most of the clients approaching them at the moment are looking to consolidate debt or lessen their debt burden.

With the cost of living rising, most sensible borrowers are now looking at ways of cutting their monthly expenditure - hoping to swap their high interest credit cards for a cheap loan.

It is no wonder that the BRC find that people currently prefer to spend the money in their pockets, rather than use plastic. With a credit crunch reality, fast rising living costs and wages static, people no longer want to borrow today and worry tomorrow, because they are already worrying.

Banks are continuing to raise interest rates on personal loans by as much as 4%. Moves by the banks to increase loan rates lend more evidence to the claim that the credit crunch has finally begun to hit consumers.

So far nine major lenders have increased charges on new loans in the past fortnight. The decision by banks to increase their rates is a direct reflection of the fact that borrowing for banks on the international money market has gone up considerably in the past two months.

However not all the rises can be blamed on the credit crunch and it would appear that many of the banks that have increased their charges are also attempting to increase their profit margins on loans. This reflects the more cautious approach that banks are now taking to lending in the wake of the sub-prime mortgage crises that hit the US housing market.

Home loans have also followed a similar path with some rates beginning to go up as well as the introduction of much tighter lending criteria.

Many banks are trying to now make up for the massive losses that they have sustained over the past few months and most banks are now reluctant to lend to each other. This inability of banks to secure a ready source of money has led to interest rates being driven up among inter-bank lending. This increasing in borrower costs that banks have sustained is now being passed onto lenders.

However, all is not bleak for consumers seeking cheap loans. There are still bargains on the market for those prepared to shop around, especially for homeowners with good credit records.

Very few of us can claim to have made no financial blunders in our lives. Sometimes the temptation to spend some of your savings on a needless treat can be too great, or we might fail to invest our money smartly, instead leaving it gathering dust in our current accounts with little prospects of gaining much interest. Below are highlighted some of the biggest and most common mistakes you can make with your money.

Many people set some money aside in case of a rainy day but even here you have to be smart in order to avoid losing out on possible financial gains. A good place to keep your savings is in a tax-free shelter such as Isa. In an Isa you can shelter £3,000 from the 20% savings tax that the government slaps on it.

Another mistake people make is in taking the first loan offered to them either on the forecourt or by their bank. Rarely are the big banks the place to find a cheap loan and forecourt finance frequently involves APR figures usually reserved for high cost store cards. The answer here is to shop around. Plenty of websites offer advice on current market rates on loans. Choosing wisely could save you hundreds of pounds.

Thousands of people still fail to plan effectively and efficiently enough to minimise the effects of inheritance tax. The best way to make sure your money goes where you want it to after you die is to make a will. If you fail to make a will, than the first £125,000 will go directly to your spouse along with all your possessions. The rest of what you own will be shared equally between your children.

A yearly holiday trip is something that everyone looks forward to and prepares for, however one thing that most people fail to do is prepare themselves by knowing how to protect their cards while overseas.  Millions of Britons are placing their bank accounts at risk of identity fraud by not taking precautions while on holiday.

Holidaymakers go on holidays to escape the everyday worry of work and bills and daily routines and get away to relax and enjoy new experiences.  However, this relaxed attitude means that many cardholders end up being a bit too relaxed with their credit cards as well, placing themselves at risk of identity theft.  With you no longer on guard, fraudsters are able to steal details of your accounts and use that information to open new credit card accounts, loans or bank accounts.

Research has found that only around 42 percent of Britons take all the necessary precautions to protect their identity while on holiday.  Another 23 percent claim that they have never even thought about protecting themselves while on holiday.

With cases of fraud on the rise, it is important that everyone takes precautions and ensures that their identity is protected.  So before you leave on your holiday it is important that you lock away all your important documents and stash them in a safe place.  You will also want your neighbour or friend to collect your mail for you and keep an eye on your home.  While you are on holiday you should keep your boarding pass or any other document that may have any information about your identity, this includes receipts from credit cards or ATM machines.  You will also want to keep your passport in a safe and secure place at all times while on holiday.

By following this advice, you should hopefully only return with a tan and some great photos. Ignore the perils and six months down the line may be the first you know that your identity has been stolen by fraudsters. Often it is only when you are turned down for a personal loan or mortgage do you realise the damage done to your credit record.

£50m has been paid out by us in missed payment fines in the first half of this year. This is despite the fact that many card companies have dramatically cut their penalty charges.

It is estimated that roughly 4.1m monthly card payments were missed since the beginning of the year, coming to a combined total value of £694,509 per month.

Currently the average cost for missing a payment stands at around £12, which is just over half the average £20 which used to be charged. The reason for a decrease in the charge is because of an Office of Fair Trading investigation which ruled that the charges were too high.

The combined total of the payment fines highlights the fact that many of us are struggling to repay our loans and the high interest rates are only going to make matters worse.

A £12 fine on top of your debt as well as the growing pile of interest will combine to make it more and more difficult to repay the loan and as time goes by the pressure will only continue to grow.

The effect of missing a payment can have serious repercussions on your credit rating and may last as long as 3 years on your credit report. Sometimes a poor credit rating will mean that you charged more interest and get turned down when you apply for personal loans or mortgages.

Those of us who are most likely to miss a payment are the 25 to 34 year olds. Roughly 13% in that age group have missed a payment in the past 6 months.

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.

Official rates of the Bank of England are at their highest since 2001 and this is driving up borrowing costs across the whole banking sector. Banks often lend each other money and the rates they are charging each other are also even higher than the Bank of England rate.

The Bank of England is refusing so far to inject more money into the economy which would help bring inter-bank lending to more normal levels. The option is available however and if credit sources get much tighter then the BOE may intervene.

No, the reason we should be concerned is that commercial lenders will eventually start to pass the rising cost of credit on to us if inter-banking lending rates remain high. If this was to happen the Bank of England may be forced to intervene in order to give the economy a bit of a boost.

The picture for us, the borrowers, is extremely complex however as some of us might actually benefit. For instance some fixed rate mortgages have decreased in price recently because the rates which the loan rates are linked too are yields on government gilts and the value of these gilts have fallen sharply in the past months.

Now on the other hand there are those of us who are known as sub-prime borrowers. We are borrowers who the bank consider to be more risky and it will be much more difficult for sub-prime borrowers to secure a mortgage. Sub-prime borrowers are the main reason for the recent crises in the credit market and that means banks are not willing to take to much risk with them anymore. Now more than ever is it important to take responsibility for tenant loans and other borrowings and ensure that repayments are made promptly. Why ensure that you are unable to buy a home in future by acting rashly now?

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 concept that traditional lending companies qualify as loan sharks is common in the financial industry, but consumers still find this hard to believe. However, when doorstep lender, Provident Personal Credit in the York area, charged an APR of 177 per cent, they arguably qualified for the undesirable label.

The company allegedly offered £45 per lead on clients that credit unions turned down, approaching these consumers by letter. These clients are typically those with insufficient income to make repayments or those with bad credit history. For many, a credit union is the cheapest option for low earners and bad debtors to get a bad credit tenant loan.
A spokesman for Provident said the letters were sent by mistake.

He said: “Most of our customers come to us through word of mouth from existing customers as our clients are generally very happy with the service.”

He claimed that the high APR is charged because agents visit customers’ homes to collect payments, and also because the company does not make charges if a person is unable to pay one week.

The practice of paying brokers a finders fee is not uncommon. However, targeting people who have been turned down by a credit union may possibly fall into the category of ‘invasion of privacy.’

Credit unions are other lenders are taking note.

Mike Horncastle, pictured, manager of the credit union said: “We are taking a principled stand on this.

“If a member can’t afford the repayments on one of our loans at 19.6 per cent APR how can they possibly afford a Provident Personal Credit loan charged at a typical 177 per cent APR?”

He said of potential defaulters: “Suddenly, people are faced with a solicitor’s letter from a doorstep lender and they have nowhere to turn to.”

Some analysts claim that, even with a high risk of bad debtors and allowance for occasional missed payments, 177% interest on a loan is unreasonable.