Has anyone noticed how many loan companies now fill up the commercial breaks? Sofa, after of sofa of happy couples are shown, with carefully manipulated stereotypes discussing the consolidation of their finances, recommending a particular provider. Couples, who have had loan requests knocked back from the standard, high street or traditional credit lenders, find themselves turning to alternative finance providers in the hope that they can move their debt situations forward.



According to the Joseph Rowntree Foundation, there is increasing concern that UK consumers are assuming unmanageable amounts of debt, which may become a precarious situation should interest rates rise or if the relatively stable macroeconomic climate takes a turn for the worst. Despite these concerns, the Foundation asserts:

“Even a casual observer of the financial scene in the UK will have been struck by the increased marketing of products – including mortgages and remortgages, car loans and debt consolidation loans – specifically to people who have an impaired credit record or who are finding their existing debt difficult to mange. It might be predicted that such borrowers would be particularly vulnerable to unmanageable debt.”

Lending to people with an impaired credit record is typically called sub-prime lending, a term more familiar with people in the US, than the UK. A number of lenders have entered this market who target their products to a customer market branded sub-prime, non-conforming or non status. In the US, this market is significantly more established and a lot of the US companies operating in this field are now marketing their products in the UK. The sheer size of the prime and sub-prime lender UK market led it to be labelled the most ‘complete’ in the world by the Miles review in 2004.

High street ‘prime’ lenders tend to operate under strict requirements and guidelines, seeking ‘prime’ customers based on criteria such as:

* Past evidence of a good repayment record

* Good personal characteristics (stable employment, income level, registered on electoral register)

The prime lending system excludes many who wish to borrow and may be able to repay the loans, but are not awarded the required credit score. The Joseph Rowntree Foundation reported that more than 25% of general credit applications and over 30% of mortgage applications are turned down because the standard criteria cannot be met, based on research by the Council of Mortgage Lenders in 2002.

The type of credit offered to sub-prime borrowers is called adverse credit. Adverse credit is available in a variety of forms including:

* Adverse loans (incorporating debt consolidation loans)

* Adverse mortgages or non-standard mortgages (encompassing first mortgages for sub-prime borrowers and remortgages for sub-prime borrowers)

* Adverse credit cards

All adverse credit products impose higher rates of interest on the borrower. Some of these financial products have been set up to genuinely help consumers that have fallen out of the mainstream assistance offered by high street banks. Yet there is growing concern, that if sub-prime borrowers do not do their homework on the options available to them, they become even more vulnerable.

Websites such as the personal finance research specialist Moneynet http://www.moneynet.co.uk provide extensive information on the different adverse credit products available, including adverse loans, adverse credit cards and non-standard mortgages. Many sub-prime borrowers who hold adverse credit cards complain of unduly high APRs, according to the Joseph Rowntree Foundation. These borrowers also complain that initial discounted rates are subsequently dropped following a single late repayment. It is a breach of the Consumer Credit Act to increase the rate of interest on default of repayments, but some sub-prime lenders get round this legislation by imposing a discounted rate which simply reverts to a ‘normal’ rate on default.

The report by the Joseph Rowntree Foundation provides an insight into the vastly inflated interest rates on some secured debt consolidation loans and unsecured debt consolidation loans, including some truly appalling horror stories from people who had failed to shop around for the best deal and neglected to read the small print.

Resources:

http://www.jrf.org.uk/knowledge/findings/housing/0275.asp Joseph Rowntree Foundation

http://www.moneynet.co.uk/ Moneynet

http://www.creditaction.org.uk/ Credit Action

http://www.citizensadvice.co.uk/ Citizens Advice Bureau