Consumers are borrowing more money than ever before. UK residents have built up a huge pile of debt in recent years and it is still growing. The total debt of over one trillion pounds comprises of both secured borrowing, such as mortgages and secured loans, and unsecured debts, including credit cards and personal loans.
Juggling several different loans at once can be difficult, especially if the total of the monthly repayments the borrower is required to make becomes unaffordable. The situation can be even worse for borrowers who suffer from bad credit as the terms and conditions of the credit products they obtain are usually harsh in comparison to clean credit products. This is usually in the form of hefty fees and higher than average interest rates.
In the past, financial advisors would have recommended such borrowers to consolidate their debts with any one of dozens of bad credit mortgages that were available on the mortgage market. Borrowers who found themselves unable to control their debts and manage several different repayments each month could consolidate their debts with bad credit mortgages and thereafter only need to manage one loan repayment per month.
This situation has changed recently, however, and it is estimated that at least half a million people who have unsecured debts will not be able to refinance them this year as they could in the past. This is mostly due to the lack of debt consolidation loans and bad credit mortgages on offer, which in turn, is a result of the tightening financial markets.
Borrowers in the UK have racked up over twenty five billion pounds of unsecured debt in total. This is mostly comprised of credit cards, store cards, and personal loans. In the past borrowers were able to remortgage their homes in order to raise the funds required to pay off their unsecured borrowings. Although this would increase the amount of debt secured on their homes, it would release them from the financial burden of their unsecured borrowings, which usually charge higher interest rates than secured loans.
Analysts are predicting a different story this year, however, as the number of remortgage products on the market has substantially reduced. This is particularly the case for bad credit mortgages which means that people who are most in need of refinancing their unsecured borrowings will be the least likely to find a product to suit their situation. Financial analysts are therefore expecting the number of Individual Voluntary Agreements (IVAs) and bankruptcies to increase significantly.
While IVAs and bankruptcy are considered a last resort as a solution for dealing with debt problems, many borrowers, particularly those with bad credit, will simply have no other choice. It seems the lack of mortgage products available to use as debt consolidation loans will force many struggling borrowers to take such drastic measures.
The lack of bad credit mortgages is an issue that is expected to improve in the medium to long term. Banks and financial institutions are working hard to make more funds available for them to be able to create the products necessary for the bad credit mortgage market. The current lack of choice may therefore be a short term problem.
