According to the latest figures from the Building Societies Association (BSA), a large number of individuals are now choosing to repay their debts on personal loans and credit cards, as opposed to saving the money in a bank or building society savings account. It is quite probable that many people have had a wake up call during the recent recession, which has prompted them to reduce their personal loan and credit card debts, in order to lower their regular monthly commitments.

Coupled with this, is the fact that a growing number of individuals no longer trust banks with their savings and therefore choose to use the funds elsewhere.

Although there has been a steady increase in the number of homeowner loan applications since the start of the year, this is still at 57 per cent lower levels than the number of loan approvals at the same time last year. Meanwhile, there has been a net withdrawal from building society savings accounts of around £494 million, as people either stop their regular savings, or withdraw cash from their accounts to repay their loans.

Adrian Coles of the BSA said “While the mortgage market appears to have recovered slightly from the start of the year, levels of activity remain depressed. There is evidence that households are looking to repay debt rather than save and it is possible that there will be a net withdrawal from the total UK savings market in 2009. Overall, building societies offer attractive savings accounts that are trusted by savers. As a result, societies have attracted substantial inflows since the financial crisis began.”

Although there has been a continuous and steady improvement in the number of loan approvals over the past few months, since the beginning of the year, this has been from an all time low level of activity and the figures just released for May will have undoubtedly had an adverse effect on confidence levels in the prospect of an early economic recovery.

The Bank of England said that the annual rate of growth for new loans stood at 1.3 per cent in May, compared with a figure of around 11 per cent at the back end of 2007 and the main reason given for the poor growth figures currently was due to lower than expected new acceptances on homeowner loans and mortgages for new house purchase, along with a continued decline in the number of loans for remortgage purposes, which have suffered greatly due to particularly low standard variable rates on borrowers existing loans making a remortgage an unattractive option.

Although the actual number of new homeowner loan cases is increasing steadily, the rate at which these are growing is the cause for concern. There were a total of 43,414 new homeowner loans which completed throughout the month of May, only 223 more than the figure for April, which is the smallest amount of monthly increase since January this year.

A charging order can be applied to an unsecured loan debt by the courts and has the effect of securing the loan on an individual’s property, thereby putting their home at risk if they default on the loan, as the lender is able to force the sale of a person’s home in order to repay an unsecured loan debt. CAB have found that a growing number of loan companies are using charging orders sooner than is actually necessary, when a borrower falls into arrears on an unsecured loan and have accused lenders of using this method of court action to frighten people into repaying unaffordable amounts on their previously unsecured debts.

David Harker of CAB said “The law as it stands leaves debtors far too exposed to unfair treatment and the risk of losing their homes from unsecured creditors. Some creditors are using the court process as a tactic to intimidate vulnerable debtors into paying unaffordable amounts. This is not only unfair to the individuals concerned who have offered payments towards their debts, but is also unfair to other creditors.

It is vital that people who are doing their best to repay their debts should be protected from further debt collection of enforcement action and from enforcement related costs that are disproportionate to the size of the debt. The current law on charging orders urgently needs reviewing and appropriate protection put in place.”

The growing concern is that an extremely high proportion of these individuals are under the age of thirty and many experts blame this trend on the fact that there is insufficient education in schools with regard to managing money and finances, with particular reference to personal loans and debt management.

In response to this growing problem, the government has launched a new initiative this week which will be known as “My Money Week”. The idea is designed to bring financial education into schools for one week from the 29th June to the 3rd July, in an attempt to provide some level of financial education for children and hopefully help them to manage their money better in the future and avoid the pitfalls of being burdened with heavy personal loan and credit card debts, which they may be unable to cope with.

The week is being organised by the Personal Finance Education Group (PFEG) and David White from the group had the following comments to make on the idea. “It is vitally important that children and young adults are educated as early as possible about money and finance. This will better equip them to make smart choices when it comes to managing their own budgets and savings in the future.

Over the past eighteen months we have all seen how a “spend now, pay later” attitude towards money has had a profound effect on some households. We firmly believe that helping youngsters learn about the importance of money management and saving is essential to giving them choices and easing their later transition into working life and adult life.”

Whilst this may be all well and good when the economy is stable and people are earning good money with plenty of job security, when we hit a bad patch in the economy, as we are doing at the moment, many individuals find themselves struggling to keep up with their personal loan repayments and credit card commitments, falling behind with payments and building up arrears on their loans, in many cases leading to long term financial difficulties.

Although this situation is seen across all age groups, it would seem that the most likely people to get themselves into trouble with personal loan and credit card debt are those aged thirty and under.

The news comes in a new report published last week by the Citizen’s Advice Bureau (CAB). The charity has said that around 62,000 individuals declared themselves bankrupt over the course of last year, which shows an increase of approximately 10,000 more than the figure for 2005 and worryingly, a large proportion of these cases relate to people under the age of 30.

It seems that many young people want to have the best of everything at an early age and aren’t all that concerned about how they get it, taking out several personal loans for luxury items such as new cars and holidays and running up huge credit card debts on weekly shopping sprees, without thinking about the consequences of how they will ever repay their debts.

CAB have seen more than 50,000 individuals under the age of 25 since the start of 2008 with financial problems due to loans and cards and many view the option of bankruptcy as an easy one, without fully realising the implications for their financial future. Young people clearly need a better level of education with regard to financial matters, before they are ever allowed to take out a personal loan, or own a credit card.

Certainly things are starting to pick up in the housing and loan markets, with buyers returning to the market, house prices now stabilising and in some cases, even increasing, along with banks and building societies slowly starting to dip their toes back into the water when it comes to offering new loans to borrowers.

Despite this good news, we are still recovering from a historically low level of activity and therefore a small increase in numbers will show up in the statistics as a relatively high percentage growth. The Bank of England have said that despite the improvements, it could be up to a further three years before banks and building societies are fully comfortable with offering loans to individuals once again, at what would be considered normal levels.

The Governor of the Bank of England Mervyn King, revealed the news yesterday, whilst speaking at a Treasury select committee. He also called on the government to grant additional powers to the Bank of England in order to supervise lenders.

He said “We were given a statutory responsibility for financial stability in the Banking act. The question I put to you in February, and to which I have not really received any adequate answer from anywhere, is what exactly it is that people expect the Bank of England to do? All we can do at present, before a bank is deemed by the FSA to have failed, is to write our financial stability report and give speeches. If you are content with that, that is fine by me. What you cannot do is turn around afterwards and say “you have a statutory responsibility, why didn’t you do something?” when there is nothing we can actually do.”

As many individual’s personal debt levels on personal loans and credit cards continues to increase and people are finding it harder to manage their debts during the current economic down turn, the OFT has warned that there has been an increase in the number of companies offering to buy peoples loan debts from them, thereby writing off a person’s debt altogether.

These advertisements and claims made by the various companies involved in this activity are false and are misleading borrowers into thinking that they can simply sell their loan debts to the company and clear themselves on any responsibility for their commitments. It is illegal to sell on your loan debts without the written consent of the original lender and the OFT have advised that anyone taking this course of action will have to pay a large fee to the company involved, yet would still be responsible for the loan and would be subject to the usual debt recovery action by the lender, as well as suffering the damage to their individual credit score.

The OFT and Trading Standards are currently working to prosecute companies offering to buy peoples loan debts. Ray Watson, of the OFT said: “Like most scams, when something looks too good to be true, it usually is and this is certainly the case here. You cannot simply sell on your debt and its liabilities and businesses that make misleading claims to the contrary are just trying to take advantage of consumers’ distress. The OFT will not hesitate to take swift action against businesses which deliberately mislead consumers.

Consumers with debt problems should contact their creditor to arrange a repayment plan or their local Citizens Advice Bureau who will be able to provide free advice.”

But, although we have seen a particularly bad situation in the housing and loan markets over the course of the past twelve months, it now looks as though things are not quite as desperate as was first thought.

The Council of Mortgage Lenders (CML) has reassessed its predictions for the current year and although this is not exactly positive, it is not as pessimistic as their previous predictions. The CML have said that they expect the housing and homeowner loan markets to remain subdued for the rest of this year, with no real change in its predictions for new loans, which it expects to be in the region of £145 billion across a total of 700,000 separate secured loans.

They have, however revised their estimate of the number of arrears and repossession cases expected over the remainder of the year, with only 65,000 repossession expected. Although this may still sound like a huge number, it is still 10,000 fewer cases than the CML predicted in December last year.

A CML spokesman commented “The raft of measures taken by the authorities have stabilised the economy and will sow the seeds of recovery over time, including the housing market. But improvement is likely to be slow and drawn out, especially as the fiscal, monetary and credit support measures are gradually unwound. Despite some recent encouraging signs, we believe it is too early to be sure that the slightly more positive news from the housing market indicates the start of a robust recovery.”

A recent survey conducted by Ipsos MORI for the Scottish Provident Insurance company amongst homeowners revealed that 89 per cent of us believe it is important to own our own home. It makes us feel as though we have been successful and have achieved something in our lives, as well as giving us a sense of security from owning a house, despite the fact that the majority of people in this situation have taken on the largest debt they are ever likely to have to own it, through a mortgage or a homeowner loan.

Although many of us achieve a sense of security from owning a property, for a large proportion of those of us with a large secured loan on our homes, this could be a false feeling. The survey also asked homeowners about what type of protection they had in place to cover their loan and what would happen to them if they were unable to work through illness or disability for an extended period of time, such as six months or more and also how they would manage to keep up with the repayments on their homeowner loan.

Of those homeowners interviewed, only 54 per cent admitted that they would suffer difficulties with their loan repayments if they were unable to work for an extended period through serious illness and only a worryingly small proportion of borrowers had taken out adequate life and critical illness protection plans to provide cover for their loans, thereby risking the roof above their family’s heads!

The main reason given for this lack of protection was cost, or people saying that they would save the money towards an emergency fund. These people are simply fooling themselves that things would be OK. If you are in this situation, make an appointment to see a financial adviser this week….you need it!

This was often done through new incentives being offered to borrowers who had come to the end of their current loan deal, or in many cases imposing heavy penalties and charges for anyone wanting to switch their loan provider, making it almost impossible to leave their existing provider until these had expired. It is therefore an interesting sign of the times that one lender is now offering incentives to its homeowner loan customers to try and get them to move their loan elsewhere.

GMAC-RFC a specialist loan company who has concentrated its business in the past on non conforming areas such as self certification and bad credit loans at reasonably high loan to value levels, is now offering to reduce the balance of borrowers loans if they consider remortgaging their home with a new provider.

Due to the recent fall in house prices, many borrowers with the company now have a high loan to value ratio on their property, which will not allow them to obtain a new loan elsewhere and the company is attempting to bring this ratio down to around the 80 per cent mark in order to allow customers to move. The scheme is to be run as a pilot and will only apply to those borrowers who will have a realistic chance of being able to get a remortgage loan.

This is a sure sign that GMAC-RFC needs to reduce the level of risk on its homeowner loan book and also free up some funding for future requirements. Jeff Knight of GMAC-RFC said “If we can reduce the mortgage balance in a way that reflects the down turn in the property market, this will help borrowers to move their mortgage to another lender and also it helps us with our long term funding.”