Archive for December, 2009

The cost of a best buy £5,000 loan has risen 1.54 per cent since the beginning of the year to 10.78 per cent despite interest rates being at a historic low of just 0.5 per cent.

The rise means customers will spend £162 a month over three years repaying the loan, or an extra £120 over the lifetime of the deal compared to last January.

Tim Moss, head of loans and debt at personal finance website Moneysupermarket.com, said: “The financial crisis may have eased but this hasn’t filtered through to the personal loan market yet.

“We have seen the banks go from choosy to almost locking down completely. By restricting loans to existing customers only, banks are able to manage their lending more cautiously.”

The Bank of England disclosed last week that non-mortgage or credit card based lending fell by £0.7 billion in October, but experts said the decline was expected given the restricted choice of loans available.

Mr Moss added: “It is no surprise: it is quite clear that the fall in this kind of lending is almost entirely down to a lack of supply.

The research by Moneysupermarket.com suggested eight out of nine high street lenders only offered loans to existing customers, typically current account customers.

A spokesman for the British Bankers’ Association, said: “The UK economy has changed considerably since the credit crunch began and it is still changing. Lenders price their loans according to the economic factors of the time, and although there is still aggressive competition for customers, there are also harsh economic realities they have to deal with.

“They still have to fund their loans using a mix of wholesale money and customers’ deposits, and neither of these options is open to them at anything like the Bank of England’s base rate.”

source: http://www.telegraph.co.uk/finance/personalfinance/6810225/Banks-increase-cost-of-personal-loans.html

Everywhere you go in the UK during the downturn, you never seem to be too far away from an advert for a payday loan.

In Middlesbrough, offers for quick and easy access to cash are found in the window of a converted church. In London, competing loan shops can be found on opposite sides of the street.

Payday loans are offers of relatively small amounts on credit to “tide you over to the next wage packet”. The industry says its typical customer earns £18,000 a year.

Competition in the area has mushroomed in 2009, according to an interim report by the Office of Fair Trading (OFT) into the £35bn high-cost credit market.

But the reasons for this are not just because consumers need the cash – it is because the lenders are short of access to funds too.

Matter of timing

The “success” story of payday loans is a tale of the credit crunch and the recession.

The global banking crisis suddenly turned off the tap of wholesale funding for banks and for specialist lenders.

With availability and access to wholesale funding having dried up, specialist lenders moved away from offering large loans and are now offering smaller, shorter-term loans.

It has also affected which customers they want to lend money to.

So the number of providers of payday loans, that offer less than £1,000 for a short period of time, has risen sharply.

“Such lenders are less dependent on wholesale funding, due to the smaller loan size and the quicker returns available on small-sum, short-term loans,” the OFT report on high-cost consumer credit says.

John Lamidey, of the Consumer Finance Association trade body, says that the increased competition has come from existing lenders or pawnbrokers moving into the payday market together with brokers and introducers, rather than a herd of new entrants.

Regulations, introduced at the start of 2005, allowed lenders to offer these loans online. These internet offers still have room to grow, he says.

Payday mayday

Attracting consumers to payday loans has prompted widespread debate.

Adverts tend to feature witheringly attractive people with a big smile, announcing how easy it is to borrow these relatively small sums. Some offer loyalty rates or pay those who recommend friends and relatives.

Mr Lamidey says that some providers on the fringes might push the boundaries, but the mainstream payday lenders are in for the long haul and so carry out credit checks and act responsibly.

One major chain is charging £9.99 for a £90.01 loan that is all repaid within 30 days. The APR on this deal is typically 260.2%.

The OFT report says that some consumers do not understand how an APR works, with many people finding it more useful to be told how much they have to repay in total rather than the APR.

The review also explains that quick access to money was the primary reason why people choose particular credit offers, even though they know that this is an expensive way to borrow money.

In fact, up to a third of users of certain high-cost credit products say they will continue to use them even if interest rates are raised so their monthly repayments are a third higher.

“I am concerned that so many people are relying on these forms of high-cost credit,” says Consumer Minister Kevin Brennan.

“That is why we have provided almost £100m to support community-based lenders such as credit unions and we have also improved the advice and support available to people in debt through the free national debt helpline.”

According to the Association of British Credit Unions, a typical loan of £200 for one month from a Manchester credit union would cost £4, at an APR of 26.8%.

But – even if they might be cheaper – the OFT’s report reveals that the government’s promotion of credit unions is not working.

“Credit unions have not achieved a significant presence in the UK,” the OFT report says.

In England, the membership rate stands at 0.9% of the population. In Wales, membership stands at 1.8% and in Scotland it is 5.6%.

These figures are low compared with consumers in Canada, Ireland and the US, the report shows.

Debt spiral

The big risk with payday loans – as with other forms of credit – is getting into a spiral of debt because the funds are not available to repay the advance, especially at Christmas time.

One young mother told the Donal MacIntyre programme on BBC Radio 5 live last year that she took out a payday loan from a shop on her high street after her wages fell, following a period of sick leave from work.

She did not have enough in her bank account when the payday loan company cashed her post-dated cheques.

As a result, she ended up paying more in bank charges than the amount she had originally borrowed and struggled to pay back her debts.

Many fully licensed loan shops are owned by American companies, and many have opened in the UK after some state authorities capped the rates they could charge in the US. No such caps exist in the UK.

In June 2010, new European regulations are likely to make cross-border lending easier.

So, for at least as long as the credit squeeze continues, they look as though they are here to stay.

Source: http://news.bbc.co.uk/1/hi/business/8402393.stm

Britons are addicted to debt with little regard for long-term savings, a major new study revealed yesterday.

A survey of Britain’s wealth by the Office for National Statistics showed that 44 per cent of the public are more inclined to spend their money than save it, saying that they would rather have a good standard of life now than provide for a comfortable retirement.

While 19.3 million households, nearly 80 per cent of the total, had racked up an average of £7,200 each on credit cards, loans and other non-mortgage related debts, only 40 per cent of men and 32 per cent of women are paying into a private pension. The figures, coming a day after the Government set out its plans to tackle Britain’s soaring deficit, show that more than 20 per cent of the population would rather “buy now, pay later”, with women far more likely to express the devil-may-care attitude towards credit. But the survey, the first of its kind, shows how these attitudes are taking their toll. More than 2.5 million households, or one in ten, were in arrears, having been unable to meet payments for at least two consecutive months. The Consumer Credit Counselling Service warned that the picture is likely to deteriorate as more people struggle to manage their debt.

Struggling with monthly finances was the main reason that people said they were not saving, and 35 per cent admitted that they had never been able to save any of their monthly income at all.

Of those who had credit or store card, who account for a quarter of all non-mortgage borrowing, 15 per cent said that they were unable to meet the minimum payments, while over half of active users said they felt the payments were a burden.

The immediacy of these concerns was reflected by the fact that almost 80 per cent of those asked said that they would rather get a guaranteed £1,000 now than receive a one in five chance of winning £10,000.

Worryingly, the data was collected over a two-year period ending in June 2008, before the recession took hold and day-to-day finances hit rock bottom for a large part of the population, making saving for retirement an even bigger struggle.

The ONS said it was unable to confirm the impact of the recession because recent data was still being processed. But the National Debtline echoed the Service’s concerns over the potential for the situation to worsen. It answered 142,710 calls from people struggling to cope with debt during the first 10 months of last year. That number was up by 23 per cent by the end of October this year.

“We have seen a continued rise in demand for advice from people with mortgage arrears and we believe that this Christmas will be our busiest on record,” a spokeswoman said.

But it was not all bad news, with 40 per cent of households saying they had saved some of their monthly income over the last year, citing retirement funds and holidays as the main incentive. In fact, over 60 per cent of the population said that they have a savings account, even if a quarter of them have only managed to amass under £500 each.

The survey found that Great Britain held a total wealth of £9 trillion, or an average of £204,000 per household, made up of the value of assets such as property and savings after debts had been deducted.

The fact that the majority of this wealth was made up from property and pension values casts doubt on the £9 trillion, since the global financial crisis has wiped millions from the value of the property and stock markets.

The ONS found a marked imbalance between the rich and poor, with the poorest half of households accounting for just nine per cent of the £9 trillion, while the wealthiest 20 per cent 62 per cent. One in ten households had almost no assets, and two per cent, of half a million households debts which added up to more than anything they owned.

The estimates of wealth also varied greatly across Britain, with London and the South East faring dramatically better than the North West and Scotland. The wealthiest area was the South East, where the median wealth came in at £287,000 per household. The North West region, however, was significantly poorer, with just £168,000. This pattern was reflected across all types of wealth measured, from property value to the value of household goods and collectibles, all amounting to less in Scotland and the North West. That education pays was in evidence, as the survey showed that households headed by someone with a degree had significantly more wealth at £400,200, whereas households where the head of family had no qualifications has almost a quarter less.

The report also highlighted the discrepancy between public sector workers and others on final salary pensions who enjoy pensions worth an average of £83,000, compared with those on defined contributions who have less than £7,000. The majority of those not saving for retirement said they could not afford to, but 40 per cent of people said they did not feel they understood enough about pensions to make an informed decision. The statistic should ring alarm bells for the Chancellor, Alistair Darling, who is encouraging voters to take saving for retirement more seriously to ease the burden on the Treasury.

The ONS acknowledged that it will be difficult to make comparisons with other surveys, as this is the first to include all the elements that make up personal wealth. But a spokeswoman said it might publish updated information next summer.

In September, the Halifax bank published its own findings on the nation’s wealth, putting the household figure at just under £6 trillion. Almost three quarters of all households owned one or more cars, while 8 per cent owned either vans or motorcycles and 5 per cent owned other vehicles such as caravans and boats. Thirteen per cent said that they owned collectables or valuables with an average value of £5,000, though it is possible people could have overestimated the value of some of their cherished goods. Those with the highest “physical” personal wealth, i.e. cars and collectibles, were more likely to be self-employed and from the South East. London households had a lower physical wealth than some regions, which could be attributed to fewer owning cars.

Families will fall into debt to buy warm clothing and food this winter, a Save the Children survey suggests.

Spending on Christmas presents and basic essentials like heating is also likely to be cut.

The survey by the children’s charity, reveals that the majority of parents earning less than £30,000 are going to struggle to manage this winter.

More than half of those surveyed (52%) said they would turn to high interest debt to cover costs.

The survey of 1,006 parents with a net household income of less than £30,000 revealed that 56% said they would buy fewer Christmas presents for their children.

‘Families scraping by’

Families on low incomes said they would have to borrow to pay fuel bills (27%), buy winter clothing such as warm coats and shoes (22%) and other essentials including food (21%).

“It is shocking that so many families have to borrow money to pay for essentials such as heating and food, with many parents forced to cut back on Christmas presents as well as winter clothes. Families cannot continue to scrape by like this,” Fergus Drake, Save the Children’s UK Director said.

Of those who live in poverty – earning less than £12,000 – almost 80% said they would struggle this winter, with 55% saying they would borrow money from high interest lenders to pay for essentials.

Save The Children’s concern is that the worst-off families often have to borrow to cover unexpected costs such as a broken washing machine, or essentials like increased winter heating bills and have fewer opportunities than better-off people to access affordable credit.

Many then take on high interest debt through catalogues, rent-to-own shops, doorstep lenders or loan sharks. The charity is calling for changes to the regulation of financial services.

‘Unscrupulous lending’

Save the Children is not alone in calling for borrowing alternatives for the worst-off families.

Oxfam has urged a maximum level of interest, set on borrowing, and a crackdown on unscrupulous lending, coupled with the promotion and funding of credit unions to provide an alternative to commercial credit.

Kate Wareing, Oxfam’s Director of UK Poverty, said: “We know that winter is difficult for all people on low incomes. One lady we spoke to for our research on UK poverty told us, ‘you sit there with no heating on during the winter, because if you put it on, you know you can’t afford it. It goes off and you get the duvets down and sit in front of the TV.’”

Christmas can add to the problem. The majority of those on the lowest incomes (63%), said they would buy fewer Christmas presents for their children this year, the survey found.

Most families expect to borrow up to £500 to cover their costs this winter and say it will take more than a year to repay it.

According to many families surveyed, their greatest worry was that they would struggle to pay it back (32%) and that it will push them further into debt (26%).