Payday loans have been around for many years and are short term loans, usually for a term of less than a month and for small amounts of borrowing, in most cases no more than a few hundred pounds at any one time.

Payday loans are available from a number of sources, such as doorstep lenders, pawn brokers and online loan companies and are designed to provide an extra bit of cash for those individuals who have either overspent, or under budgeted for the month and have run short of money before their next salary cheque is due.

Whilst this type of unsecured loan can be particularly useful and beneficial for those who need extra cash for essentials to see them through to the end of the month, it seems that there is a growing dependence on payday loans, which is beginning to worry finance industry experts, as the number of loans being taken out has increased dramatically over the past few years.

The effects of the credit crunch and recent banking crisis are still having their impact on the UK economy and banks and other traditional lenders are extremely cautious about offering loans to anyone other than those with a perfect credit history, with the inevitable result that a large percentage of the UK population are left in the situation where they are unable to obtain an unsecured loan through a traditional route.

This is causing individuals to turn to more expensive forms of borrowing money, such as payday loans, log book loans, pawn brokers, doorstep lenders and in extreme cases, illegal loan sharks.

Whilst most of these types of loans, other than loan sharks, offer a valuable and in many cases necessary service to a certain type of client who can not obtain a loan elsewhere, there are growing concerns that too many individuals are becoming too dependant on such borrowing.

A new report, published by Consumer Focus,  has revealed that the number of payday loans being take out has grown by more than four times over the course of the past four years, with somewhere in the region of 1.2 million individuals taking out loans for a total of £1.2 billion over this period.

Although payday loans are an extremely expensive way to borrow money, often having an APR (Annual Percentage Rate) of anywhere between 1000 and 2000 per cent, the impact of this cost is usually minimised by the short term of the loan. Having said that, the typical cost of such a loan is normally between £13 and £18 for every £100 borrowed, but can be as much as £30 per £100 of loan, with more expensive providers.

The real concerns arise when a borrower is unable to repay the loan once they receive their pay cheque and they are often hit with late payment penalties and spiralling interest costs as the charges and rolled up interest start to add up.

An average payday loan of £300 would normally cost somewhere in the region of a total of £360, if it was fully repaid with a month of taking it out. However, if repayment is missed and interest starts to add up, the loan could end up costing around £660 to repay after just six months.

The United States have had their equivalent of payday loans for considerably longer than the UK and there are great concerns over the amount of debt being accrued by some individuals who keep taking them out and never repaying the total amount. This has led to the position where payday loans have actually been banned altogether in certain states.

Consumer Focus, who conducted the survey in the UK are concerned at the rate of growth and popularity of payday loans, as borrowers become more desperate for money and predict that the industry could grow by as much as another 45 per cent in just a short period of time.

The typical borrower who takes out a payday loan is often single, under the age of 35 and earning less than £25,000 per annum. The majority of these people are not likely to be concerned over the interest rate being charged on their loan, just in the fact that they have some cash in their pocket to buy groceries with, or go for a night out with their mates!

Consumer Focus are concerned that at the moment there are no rules governing the use and sale of payday loans and vulnerable individuals can get in to financial trouble extremely quickly if they are not careful. As a result of this, they are calling for a review into payday loans with the intention of introducing new legislation to regulate such loans.

Consumer Focus acknowledge the fact that payday loans play an  important role in the finances of many borrowers and therefore do not wish to have them banned altogether, as this would encourage more people to turn to illegal loan sharks for their loans.

The new proposals are that payday loan providers take a more responsible attitude towards offering loans to individuals, in order to help their customers getting into unmanageable loan debt.

Consumer focus is proposing the following measures:

Borrowers should be limited to a maximum of five payday loans in any twelve month period and if five such loans have all been rolled up into one consolidation loan, the borrower should be refused any further credit and referred to an independent debt adviser.

Payday loan companies should carry out more detailed financial checks on potential borrowers before offering a loan and different loan companies should share information through a common data base in order to stop borrowers taking more than one loan out at any one time with a number of different lenders.

The main high street banks in the UK should help out by offering a realistic alternative to payday loans through offering more traditional short term cheap loans.

The use of social lending organisations, such as credit unions, should be encouraged and developed by the government and the financial services industry.

Marie Burton of Consumer Focus said “With the recent credit crunch, demand for short term borrowing has significantly increased despite the eye watering interest rates charged by some payday lenders. Such expensive rates can leave consumers who defer payments, or take out repeat loans, caught in a debt trap.”

“These products are controversial, but we don’t agree with calls for them to be banned. Outlawing payday loans could leave some borrowers vulnerable to illegal loan sharks.”

“Instead we need sensible safeguards now to stop borrowers becoming dependant on this high cost credit and prevent even more stringent controls being needed in the future. We also need banks to provide alternative short term credit to suit the needs of cash strapped consumers.”

A few years ago, prior to the credit crunch, recession and recent banking crisis, it was relatively easy for an individual to be accepted for a new loan, particularly if they had a clean credit history. But even for those borrowers who had a poor credit history, with things like loan arrears and possibly County Court Judgements (CCJ’s) lurking within the confines for their credit file, it was still possible to be accepted for a new loan, albeit at a slightly higher interest rate to account for the additional risk.

But following the recent financial problems faced by the major banks in the UK and the lack of wholesale funding for new loans to customers, financial institutions have severely restricted their lending criteria for those individuals who may be looking for a new personal loan or home owner loan.

It is now much tougher for anyone to be accepted for a new personal loan, even those with a perfect credit history, but for those borrowers who have suffered financial difficulties and problems with previous loans in the recent past, it is currently almost impossible to get the loan they require and even if they can find a lender to take them on, the interest rate and terms and conditions of the loan are likely to be so tough as to make a loan an unrealistic option.

The additional problem now though, is that due to the effects of the recession and credit crunch, a large number of individuals who have never had any credit problems in the past, are now finding themselves in the position of having missed loan repayments, loan arrears and possible defaults showing up on their credit file, in many case through no fault of their own, which has a damaging effect on their credit rating and their ability to get any new loans or credit card in the future.

So, if someone finds themselves in this position, yet needs credit and wants to be able to get the best loan deal they possibly can, what can they do in order to improve their credit rating and increase their chances of being accepted for a loan.

The first thing to do is to ensure that their address history is up to date and correct. A person should ensure that they are registered on the electoral role at their current address and that this address matches the one which is recorded on any other loans or credit agreements as well as their credit report. Although this may seem like an obvious step, a large number of loan applications are declined each year, simply due to inconsistencies in a person’s address history.

A potential borrower should also obtain an up to date copy of their credit file from one, or all of the three major credit reference agencies: Experian, Equifax and Call Credit. This will highlight any adverse credit factors which could negatively affect an individual’s ability to get a new loan and point the borrower in the right direction as to which existing loan accounts need to be brought up to date.

Although a credit file is usually an accurate reflection of a borrower’s financial status and is therefore used by the majority of major lenders in assessing a customer’s ability to be accepted for a new loan, the information held on such a file can sometimes be wrong. It is therefore vitally important to check this information thoroughly and have any errors corrected as quickly as possible.

If someone is searching the market for the best loan, it is important to minimise the number of credit scores which are carried out by lenders on them before they choose a particular loan. Every time a person allows a credit score to be conducted on them, this leaves a footprint on their credit file, which will lower their overall score and if there have been a number of scores carried out over a short period of time, this could cause them to be declined for the loan they were so keenly researching.

If a potential borrower has a few credit or store cards which are not being used, these should be cancelled with the lender, even if they do not have an outstanding balance. Each of these is a separate credit agreement and will have a credit limit assigned to the particular card, which will reduce the overall level of credit which remains available to someone needing a new loan. These limits will also show up on a person’s credit file.

One of the most important and most obvious courses of action to take to improve their credit rating, is for an individual to ensure that all their existing loan and credit card payments are made on time and their accounts are fully up to date. Catching up with any loan arrears, or missed payments and then maintaining their regular committed loan repayment amounts is probably one of the best ways to improve a credit rating.
For a potential borrower who has never had any form of credit or loan in the past, ironically this can have a negative effect on their ability to obtain a new loan, due to the fact that the lender has no point of reference for that person as to how they have managed their finances and loan debts in the past. Many individuals have been rejected for a loan simply because they have never had a loan before!
As strange as it may seem, the best way to remedy this situation is to take out a small loan or credit card, probably with their own bank and make regular payments for a few months in order to show some history of credit repayment on their credit file.

By following the course of action described above, it is quite possible to improve an individual’s credit rating quite quickly. Of course, this will not happen overnight, as it can often take a two or three months for changes in behaviour to filter through to a person’s credit file and a lender may still frown upon a person’s credit history if they have a particularly adverse case of loan arrears against them, for example.

Nevertheless, by persevering and continuing to keep on top of their existing loans and credit agreements as well as monitoring their credit file, a borrower with even the worst credit history will eventually start to see their credit rating improve over time.

After being accused of offering loans too easily and cases of irresponsible lending, the majority of loan companies are now a lot more reluctant to offer loans to potential borrowers without making sure that the customer will be able to afford the monthly loan repayments once the loan has been offered.

With money also being tight for the loan companies themselves, banks and other lenders have now severely tightened their lending criteria, becoming a lot more careful about whom they are prepared to offer a loan of any kind to.

The main way a lender will ascertain whether a potential borrower is credit worthy is to carry out a credit report on the individual applying for a loan. This is normally carried out through one of the main three credit referencing agencies in the UK, which are: Experian, Equifax and Call Credit. 

A person’s credit file contains all their individual financial information, such as any existing or previous loan agreements, their home owner loan or mortgage and any credit cards or other credit agreements they may have, even if these have a nil balance.

As well as the basic details about what level of credit a person may have, the credit report also shows how much is outstanding on the loan or credit agreement, what the original amount of the loan, or credit limit, what the monthly repayment is and also whether there have been any missed payments or arrears on any of the loan accounts.

The credit report also shows if an individual has any defaults on loans or any County Court Judgements (CCJ’s) or previous bankruptcies or Individual Voluntary Arrangements (IVA’s).

All of this information will be taken into account by the loan company before they are prepared to offer anyone a new loan. If a person has a poor credit history, with arrears and CCj’s, or even missed payments, this will reflect negatively on that person’s ability to be accepted for the loan they applied for. Even having a lot of outstanding credit will reduce the individual’s credit score and reduce their ability to be accepted for a loan, or have the rate of interest on the loan increased to reflect the additional risk.

This is all well and good and a potential borrower should always check their credit file before applying for a loan or other credit. It is also wise to check your file on a regular basis, whether or not you intend to apply for a loan or other credit, just to ensure that your records are correct.

On occasions, it is possible for the credit reference agency to hold incorrect details on a particular individual regarding their financial status (this is one important reason why you should regularly check your file). If this is the case and the credit file shows arrears on personal loan, for example, which have either been cleared, or were never there in the first place, then this could have a detrimental effect on that person’s ability to be accepted for the loan they applied for, or even mean that they are rejected for credit either now or in the future.

So let’s assume that you have checked your credit file before applying for a loan and found that there is false or incorrect information held on your record, which would affect your likelihood of being accepted for the loan you want… what can you do about it and how do you get the information corrected, or removed where appropriate?

The first thing to do is to approach the credit reference agency which holds the incorrect information. They receive many queries of this nature and generally have a standard procedure in place for handling false information.

Although it is important to approach the credit reference agency in order to correct the mistakes and errors, this may not be beneficial, or even the end of the matter. In order to correct the information on a person’s file, the credit reference agency will approach the loan company or credit card provider to which the incorrect information applies and ask for a full history of the account.

If the loan company holds correct details about your loan or other credit agreement, this will be forwarded to the credit reference agency, who will then be able to update your file appropriately. This could usually take up to around one month to complete the process.

However, in many cases it is the loan company or credit card company who are the ones holding the incorrect information about your particular loan repayments. If this is the case, then the information they return to the credit reference agency will be wrong and just go to confirm what the original report already said. This could actually make a person’s report look even worse and reduce their score even more.

It is therefore vitally important to not only contact the credit reference agency which holds the information, but also to get in touch with the loan or credit card company who may have inadvertently provided the false information to them in the first place.

It is quite possible for personal loan and credit companies to make errors and mistakes on their files and they will do everything they possible can in order to correct any mistakes and clear up a borrower’s credit file as quickly as possible.

In many cases this can be sorted out by telephoning the company in question and the problem can be rectified during the course of the phone conversation. In other cases, they may require additional information, such as copy bank statements, for example, showing that the loan repayments have actually been made on time.

The corrected information will then be forwarded to the credit reference agency concerned, who will then update their records accordingly.

As we have previously said, personal loan and credit card companies rely on the information held within a person’s credit file and if this is incorrect it can adversely affect that person’s ability to get the loan they require. It is also important to remember that it can take some time to fully correct a credit file which holds false or incorrect information on an individual.

Therefore, if you are planning to apply for a new personal loan, credit card, or any other type of credit agreement, it is well worth checking your credit file a good couple of months before you actually intend to apply for it. This way, if there are any errors showing up on it, you will have plenty of time to have this corrected and then hopefully be accepted for your new personal loan straight away without any problems.

But with the recent credit crunch and banking crisis, taking out a new loan of any kind is not just quite as straight forward these days as it used to be. Banks and building societies are struggling with their own finances and in many cases, do not have the money themselves to offer as loans and following the credit crunch many lenders are far more careful about who they are prepared to lend money to.

A large number of individuals in the UK who previously considered themselves credit worthy and could easily obtain a loan or finance prior to the credit crunch may now find that their situation has changed, in many cases through no fault of their own, and they may well struggle to be accepted for a personal loan as effortlessly as they have done previously.

For someone who is considering taking out a new personal loan, it is worth taking a little more time and effort over the process before they apply. That way they will be more prepared for any details required by the loan company at the outset and therefore be less likely to be disappointed.

The first thing to consider for a potential borrower is whether or not they actually do require a personal loan. This may seem like a strange statement, but someone may actually be better off if they used alternative methods of funding.  This could include using existing savings which are not receiving high amounts of interest at the moment, using a low rate or zero per cent credit card, or borrowing the money from family.

Once it has been established that a personal loan is the best way forward for a borrower, the applicant needs to start doing some homework prior to their application. Firstly they should work out exactly how much they need to take out as a loan. There is no point borrowing more than you need to, it only means additional interest and loan repayments.

Many lenders charge lower interest rates on larger loan balances. Although it could be beneficial for someone to borrow slightly more in order to obtain a lower rate, this should be approached very carefully. If someone were to borrow a lot more than they required, just to get a cheaper loan rate, they would almost certainly end up paying more than they thought they were saving.

The majority of lenders work on an affordability basis when it comes to deciding if a potential borrower can afford the loan they are applying for and be able to keep up with the monthly loan repayments. It is therefore important for a borrower to draw up a budget planner prior to their application. This should include their income from all sources, their outgoings on a monthly basis, such as mortgage and loan repayments, utility bills, food and essential expenses, as well as luxury items. This should them give them their disposable monthly income and a better idea for both themselves and the loan company as to just how much they can afford each month in loan repayments.

Another good idea is to get a credit report prior to applying for a new loan. This shows details of a person’s credit rating as well as any committed outgoings, such as existing loan repayments and whether these are all up to date. The credit report will also show up any missed payments, arrears and County Court Judgements (CCJ’s), giving the individual an opportunity to catch up any outstanding payments or clear any CCJ’s, thereby improving their credit rating.

It may be tempting to take a new personal loan out over the longest time period possible, as this will significantly reduce the monthly loan repayments. However, the longer the term of the loan, the more interest will be payable and therefore the cost of the loan will work out much higher over the full term. Although it is important to consider affordability, a borrower should take a loan out over the shortest period possible, as this will reduce the overall cost of the loan as well as reducing their debt quicker. Remember, you never know what’s round the next corner!

If the new loan is for debt consolidation purposes, it is important to ensure that the rate chargeable on the new loan is lower than those of the debts to be consolidated, otherwise what is the point of the debt consolidation loan? Likewise, the term of the new debt consolidation loan should not exceed the term of the previous debts, or once again you could easily end up paying more than you would have done on the original debts.

Once the money arrives in the bank account from a debt consolidation loan, it is essential to repay the outstanding debts it was meant for and do so straight away. This may seem like a redundant statement, but there have been many cases where, once the borrower sees the money in his or her bank account, the prospect of a nice holiday or new car seems very attractive! This is irresponsible borrowing at its worst and yet it happens all too often. Similarly, where credit card bills have been repaid, the borrower should destroy the cards, or at least reduce the credit limit to a minimal amount for emergency purposes only.

It is also important for a potential borrower to shop around for the best loan deal they can get. Many people assume that one loan deal is pretty much the same as any other loan deal. This is definitely not the case and before anyone settles for the deal offered to them by their local bank, they should do some research in to alternative loan providers. This has been made much easier in recent years by the vast number of price comparison websites which exist for this very purpose.

Other things which a borrower should take into consideration when applying for a new personal loan are things like fees and other charges. A particular loan deal may have a low interest rate, but if there is a large arrangement fee, this will increase the overall cost of the loan, particularly if the fee is added to the loan. The APR (Annual Percentage Rate) will give a true comparison of costs between different loans and this will be shown on the illustration.

If it is the borrower’s intention to make overpayments on their loan or repay the debt early, they should check to see if there are any repayment penalties.  If there are, it could be more beneficial to opt for a loan with a slightly higher interest rate, but no penalties.

Borrowers should also consider suitable protection for their loan. This could include life cover, critical illness cover, income protection or Payment Protection Insurance (PPI). This can be a complicated area and everybody’s needs and requirements are different, but it is important to do something. If in doubt, take advice from a financial adviser.

In conclusion, by following these simple steps, a potential borrower is likely to be better informed and better equipped to obtain the most suitable personal loan to meet their particular needs. Of course it still does not guarantee that they will be accepted for a loan, but they will stand a better chance and could potentially save a lot of money in unnecessary interest payments.

The current run up to the election is causing quite a stir amongst everybody in the UK, both on a personal and a business level. And it’s not just the banking sector and city analysts who are watching the situation keenly for a clue to the future of the UK economy, but all businesses are affected, from corporate institutions, right down to the sole trader.

Following the credit crunch and latest recession, one of the greatest concerns for people is what is likely to happen to the economy, regardless of whoever gets into power and whether or not we are likely to see economic recovery pick up, or even continue. One of the other main related concerns is whether we will start to see banks and building societies relax their lending criteria and start to offer loans once again.

At this stage, I should point out that I have no intention of getting all political about which party would be the best for the country and this is intended as a general overview of what is currently going on, with particular reference to the loan industry and what is likely to happen post election, irrespective of the outcome of the election.

Currently, the UK is still reeling from the recent recession and although we are seeing some signs of recovery, with markets picking up and banks slowly beginning to offer some more competitive personal loan and home owner loan deals, which might actually attract new customers to them for a loan, recovery is still extremely slow and the levels of growth experienced in the economy at the moment are only just in the black.

In the first few months of this year, there was quite a lot of positive growth within the housing and home owner loan markets, as well as personal loans, as consumers started to feel more positive about the long term future. But with the contest for who will run the government from May this year closer than it has been for a long time, between all three main parties, consumer confidence has dropped away significantly in recent weeks.

Rather than rushing to apply for a new loan and get accepted as soon as possible, it would appear that many consumers are taking a far more cautious approach towards their finances at the moment, and are awaiting the outcome of the election before they are prepared to commit to an additional monthly loan repayment.

In fact, rather than taking out new loans, many existing borrowers are making a serious effort to repay their existing loans and credit card debts, as many people are uncertain about the future of the economy in the next couple of years or so and the possibility of large tax rises and possibly increasing unemployment. The main reason for taking out a new personal loan at the moment is as a debt consolidation loan in order to reduce monthly repayments on existing loans and increase the level of disposable income in anticipation of whatever financial storm lies ahead in the coming months.

Many financial experts believe that the worst possible outcome of the general election would be a hung parliament result, as this could have the effect of knocking consumer confidence and that of the financial markets as well, due to a potential lack of coherent political strategy.

Even in the event of a clear victory in the election for any of the main parties, the UK is still likely to be in for a tough time over the coming months and possibly even years, as whoever wins the election will have the unenviable task of repairing the UK’s broken economy and repaying all the government borrowing and loans from the International Monetary Fund. This is almost certainly going to lead to an increase in personal taxation in one form or another and possibly even job cuts, particularly in the public sector and government positions.

It is little wonder then that many individuals in the UK are making such an effort to repay their existing personal loans and credit cards as soon as possible. Another good reason for doing so at the moment is due to the fact that interest rates on loans are particularly low currently and people wish to repay their loans and other debts before interest rates increase once again, although it looks as though the Bank of England will keep rates low for some time to come yet, despite talk of increases in the springtime of this year.

So what will happen in the future of the loan industry? All the major political parties appear to be committed to forcing the major high street banks to start offering loans once again, both to small businesses, as well as personal loans and home owner loans, although whether or not this will be successful remains to be seen, as the current Labour government has been saying that it will get the banks offering business loans again for some time now and although the banks claim that they are lending again, small businesses, as well as individuals, are still finding it difficult to be accepted for the loan they need.

At the moment, the financial and loan markets are in turmoil, largely due to the excitement of the up and coming general election. But whatever the outcome of the election may be, the likelihood is that within a few months everything will return to normal and settle back down to the dull routine.

Hopefully there will not be too much disruption and the economy of the country will continue its long slow path to recovery, however long that takes. Market forces will mean that people who are currently putting off making any financial decisions will eventually take out the loan they may currently be considering and people will continue to want to move house, boosting the housing and home owner loan markets, the status quo will have been restored and many of us more cynical individuals may wonder what all the fuss was about!

For anyone who has attempted to apply for any kind of loan recently, without a perfect credit history, or lack of proof of income, this may sound like a bit of a fairy tale. However, the truth is that only just three years ago it really was that easy for a person to be accepted for the loan they required. Even someone needing a bad credit loan could be accepted for credit without too much trouble.

But then the credit crunch and banking crisis came along. A number of major high street banks and building societies had to be bailed out with rescue loans from the Government and the ability for someone to obtain any kind of loan seemed to dry up overnight, as wholesale funding on the money markets became unavailable and too expensive for the loan industry to continue to offer competitive loan deals to customers as they had done in the past.

As the risk increased for lenders and wholesale funding became less available, many loan companies withdrew many of their loan products, or even closed their doors to new loan business altogether. Even those companies who managed to keep their heads above water, dramatically increased their rates on all types of loans as well as tightening lending criteria on areas such as credit history, income multiples and loan to value ratios on secured loans.

Many people blame the banks and other loan companies for the problem, through irresponsible lending practices in the past, or the Financial Services Authority (FSA) for not imposing adequate regulation on the banks and stopping the problem from happening in the first place. Despite a lot of bitterness and ill feeling amongst consumers, the question of pointing a finger of blame at somebody in particular has become fairly irrelevant these days, as the main question on everyone’s lips is “when will things get back to normal in the loan industry?”

Last year saw one of the worst recessions in the UK for many years and although we are now officially out of recession, the economic situation and availability of loan products does not appear to be improving at any significant rate, despite a steady increase in new loan products for home owners, with new deals coming to the market on an almost daily basis at the moment.

Don’t get me wrong, it is certainly good to see new loan products entering the market, but we’re not really at the stage where we are able to start singing and dancing in the streets about it! At the bottom point of the market, in April last year, there were only 1,209 different home owner loan products for a potential buyer to choose from and although this figure has more than doubled over the course of the past twelve months, it is still a long way from the number of available home owner loan products prior to the credit crunch. To put it in perspective, at the height of the home owner loan market, there were in excess of 30,000 different loan products to choose from!

So the question remains: is the loan industry really out of the woods yet and can we expect to see the availability of loan products return to the levels they were at prior to the credit crunch? The simple answer to this question is clearly no at the moment.

Banks, building societies and other specialised loan companies are still extremely cautious about offering loans of any kind and just who they are prepared to lend money to. Whilst the number of available loan products is continuously increasing at the moment, the underwriting of these loans and lending criteria remains extremely tight and, whatever they may claim, many lenders are looking for reasons not to offer a loan, rather than positive reasons to offer a loan.

The other factor to consider is that practically all the loan products available on the market at the moment are all aimed at the prime market, for those people with an excellent credit history, proof of income such as payslips or three years accounts and no history of previous loan arrears or defaults.

Prior to the credit crunch there was a thriving market in the area of bad credit loans and self certification loans and although some of these products were rather expensive, it meant that someone with a poor credit history, or a self employed person with no accounts could be accepted for the loan they required.

Currently there are no self certification loans at all on the market and if the Financial Services Authority (FSA) have their way, this type of loan will be banned in the future, under the Mortgage Market Review (MMR). Although there are a few bad credit loan products on the market at the moment, these are very few and far between and will only allow very light adverse credit. In the past, bad credit loans were an industry on their own with products ranging from “feather light adverse” all the way through to “heavy adverse” for people with a number of current County Court Judgements (CCJ’s) and even current high loan arrears levels.

One of the main drivers for the loan industry is the housing market and although we are seeing house prices increase steadily at the moment, many experts believe that we could yet be in for another drop in the market, effectively leading to a “double dip” recession.

The loan industry is currently on a knife edge road to recovery and any fluctuations in market conditions could cause a second and possibly deeper downturn. If house prices or the base rate of interest were to increase too quickly, many first time buyers and other house movers, could be priced out of the market and be unable to afford the loan they required.

This is a fine balancing line which needs to be controlled by the Government, the Bank of England and loan providers all working together in order to stop a second wave of recession in the UK and 2010 could yet go either way.

In conclusion, it is fair to say that the loan industry and availability of loan products for customers is a long way away from where it was prior to the credit crunch. Furthermore, it is likely to be a long time before we ever get back to where we were before the recession, if we ever do. Even if the loan industry does recover fully, this is likely to take years, rather than months and even then it is unlikely that we will ever see the return of products such as self certification loans and heavy adverse loans, along with things like the high 125 per cent loan to value products, which many people took for granted.

We are certainly on the long road to recovery, but the loan industry and consumers alike must be patient and be more realistic about the loan products on offer and take a responsible attitude to both lending and borrowing. It will take time and there is no magic which can simply be waved to make things right once again!

Even a person who may have a perfect credit history and high credit score may still struggle to get the personal loan they want at a reasonable rate. 

Despite the fact that the Bank of England Base rate of interest is at its lowest level ever in the history of the bank, the typical cost of a personal loan seems to be getting more expensive all the time and it may appear to some individuals that the days of being able to get a cheap loan may have gone forever.

As banks and other personal loan companies become ever more cautious about who they are prepared to lend money to, the average rate on a loan has steadily increased over the course of the past twelve months.

At the same time as interest rates on loans are increasing, the choice is actually becoming less, as several lenders have withdrawn from the loan market altogether. In fact, the number of different personal loan deals available on the market has actually decreased by more than a quarter over the course of the past twelve months alone.

One important factor which must be considered when applying for a new personal loan is that as the amount borrowed on a loan increases,  the average interest rate actually goes down, which means that it is quite possible that the more a person borrows, the less they will actually pay on the interest rate charged.

Although it might be expected that a larger loan would be more expensive than a small loan, due to the increased risk and exposure for the lender, it seems that the exact opposite is true.

New research from Moneyexpert.com has revealed that someone who applies for a personal loan of just £3,000 is likely to pay double the rate of a person who applies for a personal loan of more than £7,000. The research has found that the average interest rate on a persona loan for £3,000 currently stands at 19.3 per cent, whereas the average interest rate on a personal loan for a value between £7,000 and £10,000 is just 10.3 per cent.

A number of banks and other loan companies are now starting to offer competitive, cheap loan rates. However when the small print is looked at, the vast majority of these rates are only available for loans in excess of £7,500.

This, of course, could be beneficial for someone who is looking for a debt consolidation loan, for example. If an individual has a number of existing personal loans which were taken out with small balances, it is likely that they will be paying a high rate of interest on each of them. By bringing all of these loans together into one large debt consolidation loan, it is quite likely that the overall interest rate being charged will drop significantly and in this type of case, will probably save the borrower a large amount of money in interest payments over the full term of the loan, provided that the term is not extended by too long above the term of the original debts.

Whilst this is all well and good, there are a number of concerns beginning to arise amongst experts who deal with helping individuals manage and cope with their personal loans and other debts.

One of the big worries is that some people, who only require a small personal loan for a purchase, may be tempted to apply for a much larger loan than they actually need, simply in order to try and obtain a cheaper rate on the loan.

Of course, if someone is a borderline case on a rate drop, for example: someone needs a personal loan of around £7,000, but the interest rate charged goes down at £7,500, it could possibly be in the interests of the borrower to take out the larger loan in order to save interest.

The way of checking what is the best option in such a case is to look at the overall cost of the personal loan over the full term. The total cost of a loan is shown in the illustration and literature provided by the lender and this figure will show whether or not it is in the best interest of the borrower to apply for a larger loan in order to achieve a lower rate.

In a large number of cases however, it will not be in a borrower’s interest to apply for more money on a personal loan than they actually need, due to the fact that although the rate may be cheaper on a large loan, the borrower will be making monthly repayments and interest will be charged, on a much larger sum and as a result of this, the borrower is likely to have to repay far more than they would have done on a smaller loan with a higher interest rate.

Despite what should be a simple logical decision with regard to applying for a personal loan, many potential borrowers may not consider these factors and simply see a cheaper loan rate at a higher amount and therefore apply for more than they require, thereby increasing their debts and the amount they owe quite needlessly.

It would appear that the high street banks and other mainstream loan companies are not really greatly interested in offering small personal loans to individuals, a fact which is reflected in the level of interest rates they charge for such loans.

It is vitally important that someone thinking about taking out a new personal loan, for whatever reason, should not be tempted to borrow more than they need to simply to achieve a lower interest rate. This course of action is likely, in most cases, to end up costing them more.

With interest rates on loans continuing to increase and the choice of providers decreasing at the same time, it is more important than ever to shop around to get the best deal on a personal loan. There are now a large number of price comparison web sites which can be of great help for someone looking for a loan. Another alternative is to take professional advice from a Financial Adviser or Loan Broker, who will be able to give independent advice on the best type of loan to meet your needs, as well as the best provider to apply to for a personal loan and whether it is in a borrowers best interests to apply for a larger loan simply to obtain a cheaper interest rate.

The economy in the UK, like many others across the rest of the world, has since been on a downward spiral, leading to a deep and continuing recession, which is the worst that the majority of individuals are able to remember and although we are slowly starting to see the first glimmers of signs of recovery, it is likely to be a long time before we are able to say that the economy has recovered fully and got back to the position it was before the credit crunch struck.

Although many people hold the Government responsible for the current state of the economy, they have taken significant action in specific areas of the economy in order to stop matters becoming worse than they already are. But what has been done to ease the problem, how long will it take to repay the loans and other debts accrued by the government along the way and where are the areas which have directly benefitted the average man in the street, who may be struggling to make his budget stretch to cover his monthly loan commitments and other bills, or possibly looking to take out a new loan to purchase a new car for example, or a home owner loan in order to move house, or get himself onto the housing ladder as a first time buyer.

In this article we will look as a few of the schemes which have been introduced by the Government and what benefit these may or may not have had for various individuals.

Probably the most notable scheme the government has carried out has been the quantitative easing programme of introducing more capital into the economy and the huge loans which have been granted to various banks in order to stop them going out of business.

Although this has cost the tax payer in the UK hundreds of billions of pounds in loans, all of which will have to be paid back in some form of tax increase eventually, these schemes have managed to keep the cash flow of the economy going, allowing people to spend money on the high street and therefore support businesses and it would be hard to imagine a world without a banking system, or a facility for a person to obtain the personal loan or home owner loan they require.

Despite the fact that many of the loans to banks are in the process of being repaid to the government, many of these institutions have been split, with the Government retaining the portion of the businesses which hold the “toxic” loans and other bad loan debts, effectively writing off this portion of the loan debt and placing the burden with the tax payer.

With regard to looking after those people with existing home owner loans and mortgages, who may be struggling to keep up with their loan repayments due to unemployment or reduced pay or working hours, the Government has increased and extended the benefits available under the income support rules for mortgages, as well as tightening up the rules for banks and building societies to be able to take action against borrowers for repossession proceedings, having the effect of keeping more people in their homes, who might otherwise have lost them due to increasing loan arrears.

Of course, the other, more obvious benefit has been that of the Bank of England reducing interest rates on home owner loans to the lowest point in history, thereby having the effect of reducing the monthly home owner loan repayments for thousands of individuals, in some cases by hundreds of pounds every month and making it much easier for these borrowers to manage their monthly budget. 

A couple of the more immediately obvious schemes which have been introduced by the government are the car scrappage scheme and also raising the threshold for stamp duty on house purchases from £125,000 to £175,000.

The car scrappage scheme was introduced for an initial period to encourage people with cars more than ten years old to trade them in for a brand new vehicle, providing that they had owned the car for at least twelve months. The scheme offers a minimum scrap value of £2,000 to the buyer on their old car, if they trade it against a brand new model. This scheme has been very well received by all and has provided a welcome boost to the UK motor industry.

Many car dealers have even extended the offer by increasing the scrap allowance, or reducing the price of a new car, or offering incentives such as a cheap loan or an interest free car loan. the car scrappage scheme has been a success on several fronts; firstly it provides a much needed boost for the motor trade throughout the recession, secondly it allows people to trade up to a brand new vehicle, where they maybe could not have afforded to do so previously and also it removes older, more polluting cars from the road, having a positive impact on the environment.

The car scrappage scheme has now been extended to the end of February next year and we shall see then if it is to be continued after that period.

The other popular government scheme has been the stamp duty holiday.

The housing and home owner loan markets have been one of the worst hit areas of the economy during the recession and to encourage first time buyers back in to the housing market and apply for their first home owner loan, the government has raised the threshold for stamp duty land tax payments from £125,000 to £175,000.

Although many experts were cynical about this scheme, due to the fact that most houses cost more than £175,000, it has proved popular and has worked in attracting first time buyers into the market place, with an increase in both property sales and new loan applications. A total possible saving of £1,750 may not seem to be a lot in the grand scheme of things when it comes to buying a house, but it has been just enough of an incentive for many to make the step on to the bottom rung of the property ladder.

Many experts have called on the Government to make the holiday permanent, or at least review the stamp duty system to make it more realistic for the twenty first century, but the Chancellor, in his pre budget speech recently, said that the holiday would end on the 31st December this year and we have already started to see the impact of this decision on the market, as the number of first time buyer loans and sales has dropped significantly from their peak this summer, when around 43 per cent of home owner loans were taken out by this sector of the market.

So as we look forward to 2010 and many experts are saying that the UK will finally leave recession behind and start to see positive growth once again, it will be interesting to see what action the Government takes to continue or abolish the various schemes it has introduced. This is likely to be a fine balancing act, as continuing the schemes indefinitely will increase government debt and therefore the eventual bill for the tax payer, but if these various schemes are cancelled, it could have a negative impact, throwing the country back into a second wave of recession, an example of which we have already partially seen with the end of the stamp duty holiday.

Either way, we are likely to be in for a long and slow recovery, but it is probably safe to say that we would have been in a much worse position than we currently are, if the Government had done nothing at all. We wish you all a merry Christmas and look forward to hopefully a prosperous new year!

Sorry, I got a little distracted there, but quite often the prospect of Christmas approaching and all the festivities that go with it, can have that effect on people, particularly when it comes to spending money, or in many cases borrowing it through personal loans and credit cards.

Many people living in the UK at the moment have just experienced possibly the worst couple of years in their lives, with regard to their personal financial situation. Debt levels on personal loans and credit cards have soared, as individuals use borrowing to supplement their falling income and wage cuts and rising unemployment has caused an increase in the number of people being declared insolvent, or even bankrupt.

But let’s not worry about all that at the moment, because Christmas is on its way and we can all forget about our financial woes for a short period of time and spend what little money we have left on expensive presents for each other (which the recipient usually either doesn’t want or need!) and fuel the supermarkets profits by purchasing excessive food and drink, which will only leave us with indigestion, a hangover and probably a diet in January!

In case you weren’t aware, that last paragraph was largely sarcasm! Just because Christmas is approaching doesn’t mean we can forget about our existing personal loan debts and other monthly commitments, they will all still be there in January, but for many individuals the prospect of receiving their January credit card statement, or looking at the overdraft level on their current bank account is likely to have an extremely sobering effect on them and in some cases induce panic as they wonder how on earth they intend to pay for the excesses of the festive season.

Many individuals are likely to start thinking about Christmas around this time of year, closely followed by worries and concerns over how they intend to pay for it. Some more forward thinking individuals may have been saving up in a separate bank or building society account, or even through a Christmas club over the course of the year, but with money being tight for many people this year due to the recession, in many cases such saving is one of the first things to be stopped, leaving people with a distinct lack of funds to pay for their Christmas shopping.

The sensible course of action is, of course, to simply cut down on expenditure on presents, food and booze, but with human nature being what it is, for the majority of us this simply will not happen.

So how will people pay for the festive season this year? Many individuals are likely to just spend without regard for the consequences and then receive a nasty shock in January, when they receive their credit card bill. This additional commitment could be too much to bear for some people, who may already be up to the limit of their finances and can not afford any further monthly outgoing on debt repayment. For these people, a debt consolidation loan may be the answer.

A debt consolidation loan can be used to roll up all an individual’s debts on various unsecured loans and credit cards into one monthly repayment amount, which is usually considerably cheaper than the sum of all the previous loan and card repayment commitments. It is important to ensure that the interest rate payable on the debt consolidation loan is lower than those of the debts which are being repaid, otherwise there is little point in the exercise. Similarly the term of a debt consolidation loan should be considered carefully. If the term of the new loan is considerably longer than the existing loan and card debts, then the borrower could still end up repaying more, even if the monthly repayments are lower, due to paying additional interest for a much longer period of time.

Other individuals who are faced with the prospect of Christmas shopping without any money are likely to consider taking out a personal loan of some description in order to cover the cost. This time of year is traditionally an extremely good time for doorstep lenders, who offer small, cash loans to individuals who are unlikely to be able to obtain a personal loan from a bank or other mainstream loan company.

These loans are often for sums less than £500 and due to the availability of these loans for people with a poor credit history, the interest rate is usually extremely high and makes this option one of the most expensive ways to borrow money. Most people taking this route are unlikely ever to consider the APR (Annual Percentage Rate) they are paying, just as long as they are able to get some cash in their hands to enable them to cover their Christmas shopping.

For individuals with a better credit rating, a personal loan from a bank is usually a better option for a cheap loan, although borrowers should still be wary of these. People taking out a personal unsecured loan for Christmas are only likely to need a relatively small amount, compared with the average loan size. Loans for under £5,000 (and certainly under £1000) tend to carry with them some of the highest interest rates and in many cases it would be cheaper for the borrower to find a low rate or interest free credit card, for these sort of borrowing levels.

It is also important to consider the term of a loan for Christmas. Although it may be tempting to take a loan out over a few years term in order to reduce the repayment levels, this would mean that the cost of one Christmas has been extended over several years and if people need a loan every Christmas…….well you can see the immediate problem straight away! (if you can’t, you really shouldn’t be applying for a loan at all!!) Therefore, the maximum term of a loan for Christmas should be twelve months and although this will increase the monthly repayments, it will make the loan cheaper overall.

It can often be a difficult time financially for people at this time of year, but it is vitally important to maintain a sense of perspective under the circumstances and not over commit to loans and other debts which will hang over you for years to come. It is easy to say that we should all save up for Christmas over the course of the year, thereby avoiding all the problems and worries face by the majority of the population, but well organised people will do this, having the cost of Christmas covered well in advance.

It is true to say that I started this article in a fairly light hearted spirit, quoting lyrics from a well known Christmas song, but perhaps Mr Noddy Holder is more perceptive than we all realise, when you listen to the next line of the song……”look to the future now it’s only just begun!”

In past times, this was particularly socially unacceptable and those who could not afford to repay their loans and other debts were thrown in the debtor’s prison. If this were still the case today, the prisons in the UK would be even more overcrowded than they already are.

Personal debt on loans and credit cards is still continuing to grow, despite the recent recession and slow down in the economy and with the total amount of personal debt in the UK standing at around £1,457 billion, excluding home owner loans, mortgages and secured loans, it is little wonder that an ever increasing number of individuals are struggling to keep up with their monthly loan repayments.

In many cases, people are falling behind with their loan repayments and building up significant arrears on their personal loans and credit cards, whilst actually increasing their debt levels to make ends meet, rather than reducing the amount they owe.

So, what should someone in this situation do to get themselves out of what inevitably becomes a downward spiral of debt? There are a number of options available to people who are struggling to manage their finances and the course of action taken will depend on the magnitude and severity of their debts. Some of the options are discussed below, but it is important not to rush into the first option which presents itself, as this could actually make matters worse in the long term.

Debt Consolidation Loan

For those individuals who have a number of personal loans and credit card balances outstanding, it may be possible to take out a debt consolidation loan, providing that all the existing loans and debts are up to date and have no outstanding or previous arrears problems.

The purpose of a debt consolidation loan is to combine a person’s various debts into one loan and therefore only have to deal with one monthly repayment amount. A debt consolidation loan may be an unsecured loan, or secured on the borrower’s property, depending on the amount borrowed. It is important to ensure that the interest rate charged on the new loan is less than those of the debts which are being repaid, there is no point switching a credit card with a zero per cent rate to a loan with a ten per cent rate, for example.

In many cases, the term of a debt consolidation loan is longer than those of the debts being consolidated. Although this will reduce the monthly repayment amount, interest will be charged over a longer period and therefore the loan may work out more expensive than the previous debts over time.

Debt Management Plan

If it not possible to be accepted for a debt consolidation loan, the next step is often to apply for a debt management plan. This type of plan is usually managed by an independent company who will deal with all the various loan and credit card companies on behalf of the borrower. The management company will negotiate with all the various creditors and agree a reduced monthly repayment amount which is affordable for the borrower. The borrower will then make a single monthly payment to the debt management company who will distribute the funds accordingly.

They are also likely to charge a fee for their services which will be included in the monthly amount and the borrower should check on the amount of this before committing to the plan, as it could be significant. The benefit of a debt management plan is that the company will deal with your creditors on your behalf, although it is possible to come to an arrangement with loan and card companies directly, which is likely to save money, but the borrower is doing the work themselves.

Taking out a debt management plan is likely to damage an individual’s credit rating, although someone in the position where they are looking at this option is probably already in this position and such a plan could help to repair it over a longer period and it is a less formal course of action than an individual voluntary arrangement.

Individual Voluntary Arrangement

Individual Voluntary Arrangements (IVA’s) are for people with severe financial problems and are in arrears and unable to keep up with their repayments on a number of personal loans and credit cards.

An IVA should only be entered into if all other options are unavailable and it is the final stage to stop a person from being declared bankrupt and as such it will have a similarly damaging effect on a person’s credit rating for at least six years.

An IVA is a formal agreement between the borrower and their creditors and is overseen by an insolvency practitioner. Both the borrower and the loan company (or other creditor) agrees to pay a percentage of the debt over a fixed period of time and the borrower is committed to making a single monthly repayment to the IVA company, if these payments are not maintained, the borrower may be declared bankrupt.

Assuming that all the repayments are maintained, after the full term of the IVA (usually 5 years), the borrower is declared free of unsecured debts covered by the IVA, whether the full loan amount has been repaid or not, although they are likely to find it almost impossible to obtain any form of personal loan or other credit for a considerable time after the IVA has finished. As we have previously said, an IVA is the last resort before bankruptcy.

Bankruptcy

Bankruptcy really is the last resort for someone with credit problems, encompassing large loan and credit card debts with arrears and probably defaults and CCJ’s (County Court Judgements) registered against them and will have a severe impact on the borrower’s future credit rating.

Bankruptcy should only be considered when all other possible solutions to the problem have failed. When someone is declared bankrupt, all their assets, including their home and other possessions may be seized in order to repay outstanding debts and they will be unlikely to be able to get any form of loan or credit during the bankruptcy period, which will last for three years.

Even when a bankruptcy has been discharged, it will be difficult to obtain a loan for anything other than minimal amounts. Other assets, such as an inheritance may also be seized to repay debts and someone who has been declared bankrupt will never be able to take a position as a company director, an MP, a Councillor, or be able to work in the finance industry or as an estate agent.

A bankruptcy is a matter of public record and will be published in the local press, so family, friends and any people you have had business dealings with, will be aware of the situation. Bankruptcy is a drastic course of action and should only ever be considered as a last resort.

In Summary

All of the above choices are only intended as a guideline and to provide some basic information on the various options which are available to someone in financial difficulty. Although it is essential to take action sooner rather than later in order to deal with loan debts, it is vitally important not to rush into a particular option without considering the alternatives. A sensible option is to take professional advice from either a financial adviser, debt counsellor, or one of the various financial charities which offer free advice and help, such as the Citizens Advice Bureau, or Credit Action.

Of course, the best solution is to not take on more loans and debt than you are able to manage, not only over a short term, but also for a number of years. Although this is little comfort to someone who is already in a difficult financial situation, for whatever reason, once they have resolved their current financial problems, they should learn from their previous experiences and not fall into the same trap again.