Archive for March, 2010

Banks have massively hiked interest rates on personal loans during the slump, raising the cost of finance for cars, sofas, and other major purchases by hundreds of pounds, new research for The Independent shows today.

Figures from the personal finance group Defaqto show the average annual percentage rate (APR) on a £5,000 loan has jumped from 9.8 per cent to 13.9 per cent in the past two years, increasing the cost of borrowing by 42 per cent.

Banks and building societies have raised the cost of unsecured borrowing even as the Bank of England base rate has plummeted – between March 2008 and this month, the Bank’s benchmark fell from 5.25 per cent to a 300-year low of 0.5 per cent. Over the same period, the cost of servicing a £5,000 loan on a three-year term, for example, has increased by £352 to £1,143.

During the same two years, which includes the six-quarter recession that ended in September, lenders have increased their APR on credit cards to a 12-year high of 18.8 per cent.

Banks are believed to be using the high rates to discourage unsecured borrowing, as they repair damage done to their balance sheets by reckless lending that threatened to push several into bankruptcy.

Figures from the British Bankers’ Association show that its members have slashed their exposure to structured personal loans by £15bn in two years – from £67bn at the start of 2008 to £52.3bn last January. In January, banks lent 29 per cent less in the form of personal loans than they did the previous January.

Many banks will now only lend to customers with current accounts, and are matching loan rates more closely to the credit records of individuals. They are also rejecting more applications for credit – which poses difficulties for businesses reliant on consumer credit, such as car dealerships and furniture showrooms.

“There is not a great deal of appetite among the lenders to do lots of un- secured lending, and for the last few years there is a definite push towards ‘quality not quantity’,” said David Black, a banking analyst at Defaqto. “Many of the banks are focusing their un- secured lending on existing customers; so to get an unsecured loan or credit card from HSBC or RBS you now have to have a current account with that provider.”

He added that lenders were also making up for the loss of profits from Payment Protection Insurance (PPI), the lucrative policies traditionally sold with loans. Under new rules introduced by the Competition Commission in October, providers have been banned from asking borrowers to take out a policy to cover sickness or redundancy in the first seven days of a credit agreement.

Mr Black said: “The absence of PPI sales income is one of the main factors behind the rise in unsecured loan rates. The banks used to make a big profit from selling payment protection insurance in conjunction with unsecured loans, but this income stream has reduced substantially.”

Several high-street lenders have announced hefty increases in rates on personal loans since the start of 2010.

In January the Halifax bank, now in the partially state-owned Lloyds group, increased its APR on loans below £5,000 from 18.8 per cent to 22.9 per cent, and for loans of £5,000 to £6,999, from 12.8 per cent to 19.9 per cent.

Last month, fellow high-street giant HSBC raised its APR from 8.7 per cent to 9.9 per cent. Marks & Spencer Money did the same for loans over £7,500.

Banks have also been forced to write off more bad debts as people struggling in the slump are unable to make repayments. Lloyds increased bad debt charges from unsecured lending by £1bn to £3.4bn last year, saying impairment losses were “sensitive to economic conditions, particularly unemployment levels”.

Similarly, RBS Group wrote off £1.5bn of unsecured lending in 2009, up from £988m in 2008. In September, Nationwide building society said it was cautious about handing out loans, given the slump, and would continue to concentrate on “quality” lending rather than achieving more volume.

The Spanish banking group Santander slashed new unsecured personal lending by 36 per cent last year.

HSBC and RBS declined to comment. Lloyds said: “We offer personal pricing, so it’s not linked to the Bank of England base rate. It’s based on a number of factors that takes into account a customer’s circumstances.”

 source: independant.co.uk

Using a prepaid card is one method being suggested to prevent consumers from getting into debt.

David Rodger, managing director of the national charity the Debt Advice Foundation, said that an advantage to the product is that it stops people from going into the red and acquiring interest because they can only spend what is on the card.

“The customer gets all of the advantages of using a credit card, without the risk or temptation of spending more money than they have,” he said.

These cards can still be used in the same way as a credit card, enabling users to pay for things over the phone or online, he explained.

However, Mr Rodger concluded that there is one issue in that consumer will still have to limit themselves to only loading onto the card what they can afford.

Recent statistics from unbiased.co.uk stated that credit card debt in the UK currently stands at £54 billion, with the average person needing to use their first 50 days’ worth of earnings just to pay off the interest they will accumulate.

source: Moneynews.co.uk

The ‘lost generation’ has been hit hard by the economic downturn as young adults have struggled to get jobs and make ends meet, so they are having to rely on their parents more than ever for support.

According to research from the fourth annual Scottish Widows Savings and Investment Report, adult children are continuing to ‘sap’ their parents’ savings and investments and while the average amount being handed out has increased significantly, the number of parents able to give has fallen.  Almost half (47%) of parents with children over 16 have given or loaned money to their adult children or grandchildren; this is a drop of 9% from 2009, but the average ‘Savings Sap’ is £13,660 (up from £11,800 last year), revealing those parents able to give are being forced to give more as their children struggle. The overall saving sap fund has decreased to over £64.3billion, from £72.5 billion last year.

Many young adults are forced to borrow from their parents just to get by, over a third (35%) are digging into their parents pockets to fund day to day spending and living expenses, compared to nearly a quarter last year (24%) Over a third (38%) needed the parental handouts to pay off debt and 34% needed the cash for a house purchase. Whilst one in ten of those using mum and dad’s (or grandparents) money are doing so in order to train for a new career as many people have had to reassess their career options.

Iain McGowan, savings expert at Scottish Widows comments: “”Our “savings sap” research highlights the “double whammy” of the recession where children are relying on their parents. On the one hand, “generation Y” is looking ever more to its parents for help as it struggles to get jobs, credit and mortgages – and to clear debt. At the same time, the “Bank of Mum and Dad” is not as readily available as it once was, often for the same reasons. This means that fewer parents can afford to give or loan money, while those who can, are being asked to provide more. The overall effect though is a fall in the “savings sap fund” in these challenging economic conditions. ”

The immediate effect the saving sap fund has had on parents is also alarming.  82% of parents who gave money to family members had to dip into their savings to do so, and worryingly 54% of these do not think they will be able to top up their savings. Handing money out to their kids has also led over a fifth (22%) of parents to cut back on day to day spending, one in ten have increased their own levels of debt including mortgaging or remortgaging their property, nearly a third are saving less (31%), and 12% have stopped saving altogether. If parents didn’t have to hand out their hard earned cash, 32% would have been likely to save it toward their retirement.

The research also reveals that over half (52%) of all parents with children aged 16 plus that have already given money to their children are expecting to give again in the future. This group of parents think that they will have to donate on average another £14,159, over £1,500 more than was predicted last year (£12,564), which on top of the £13,660 they have already given means that they are only half way through their giving cycle.  However, not all parents are in a position to give their children or grandchildren a helping hand. Nearly a third (31%) of those who have not given any money to their children or grandchildren could not afford to, and 18 % had no savings to give.

Iain McGowan continues “With many parents only half way through their giving cycle, this is a worrying situation to be in. Parents will not only be extremely vulnerable to any unforeseeable circumstances such as salary cuts, but the extra handouts to their kids can also affect them in retirement, meaning they may have to work longer, or make their retirement savings stretch further. The earlier parents and children get into the habit of saving the better. Saving regularly into a tax efficient savings vehicle such as an ISA can help to build up a “Sap Fund” and make a big difference.”

source: easier.com

Sixteen million workers, or more than half the UK’s workforce, do not expect to get a pay increase this year, a survey suggests.

A further nine million expect to receive a pay rise below the level of inflation, the YouGov survey suggests.

Among those who do expect a rise, nurses, civil servants and teachers expect the smallest salary increase.

The survey also suggests a third of consumers in the UK think they will be worse off this year than last.

It also suggests that more than five million consumers spend more than they earn, and of those nearly half are using overdrafts to make up the difference.

“Consumers face a double threat – the government is toying with measures such as raising taxes to reduce the public deficit, which will have a direct impact on personal finances,” said Ann Robinson at uSwitch, which commissioned the survey.

“When coupled with lower than anticipated salary increases, it can only mean that we are in for a bumpy ride, and the situation could get worse before it gets better.”

The online survey was conducted during February among 4,235 adults.

source: BBC.co.uk

Provident Financial results make depressing reading. Not for shareholders (the group has actually fared surprisingly well in the recession), but for those of us who hoped we might have learnt some lessons from the credit binge and subsequent recession.

Despite having gorged on expensive credit – and paid the price – it appears that our appetite for financing our lifestyles on the “never, never” has far from diminished.

Tuesday’s results from Provident Financial reveal that the number of customers using Vanquis, Provident Financial’s “non-standard” credit card – which charges up to 74.75pc APR – increased 5.4pc to 428,000 over 2009. It may seem extortionate to you and me, but it is a price that Provident’s customers appear only too happy to pay in order to consume today rather than tomorrow.

Despite the penal interest rate, the average customer “balance” increased more than 30pc. As Peter Cook, Provident’s chief executive, noted, existing customers are the “main source of growth”. It is a similar picture for Provident’s doorstep lending business which reported growth of 5.1pc at the year end despite charging customers an even higher interest rate than Provident’s credit card business.

The growth is not the result of a rash of irresponsible lending by Provident (although it is debatable if lending at 74pc could ever be described as responsible). Over the year Provident’s direct loans business accepted just 1pc of leads provided by brokers and the group’s impairments increased marginally from £197.3m in 2008 to £216.7m in 2009 despite the recession.

The reality is that Provident merely reflects a wider picture. Despite everything, over the last two years UK household debt has actually risen (if only marginally) increasing from £1.41 trillion in January 2008 to £1.46 trillion at the start of the year.

source: telegraph.co.uk

Total UK personal debt at the end of January 2010 stood at £1,463bn. The twelve month growth was 0.8%, reveal the results from Debt Facts and Figures – Compiled March 2010 by Credit Action.

Total lending in January 2010 rose by £2.0bn; secured lending increased by £1.5bn in the month; consumer credit lending increased by £0.5bn (total lending in Jan 2008 grew by £8.4bn).

Total secured lending on dwellings at the end of January 2010 stood at £1,237bn. The
twelve-month growth rate was 1.0%. Total consumer credit lending to individuals at the end of January 2010 was £225bn.

The annual growth rate of consumer credit was less negative at – 0.2%.

Average household debt in the UK is ~£8,939 (excluding mortgages). This figure increases to £18,623 if the average is based on the number of households who actually have some form of unsecured loan.

Average household debt in the UK is ~£58,040 (including mortgages). If you add to this the December 2009 pre budget report figure for public sector net debt (PSND) expected in 2014-15 (excluding financial interventions) then this figure rises to £116,493 per household.

Average owed by every UK adult is ~ £30,306 (including mortgages). This is 129% of average earnings. Average outstanding mortgage for the 11.1m households who currently have mortgages now stands at ~ £111,474. Britain’s interest repayments on personal debt were £68.3bn in the last 12months.

The average interest paid by each household on their total debt is approximately £2,710 each year. According to PwC the average household will need to spend approximately 15% of net income purely to service the interest payments arising from this debt. Average consumer borrowing via credit cards, motor and retail finance deals, overdrafts and unsecured personal loans has risen to £4,667 per average UK adult at the end of January 2010.

source: myintroducer.com