Whilst much of this current loan debt is blamed on the credit crunch and current economic situation in the country, a new report has suggested that many families across the UK were reliant on personal loans and credit cards long before the credit crunch ever happened.

The independent think tank, Resolution Foundation, has published a report which shows that many households were spending more money than they earned, for up to ten years prior to the credit crunch, funding the difference between income and expenditure with personal loans and credit cards.

The report has shown that this habit was most prevalent amongst low and middle earning families, with some of the lowest 10 per cent of earners, exceeding their income by as much as 40 per cent on their spending, a situation which is clearly unsustainable.

Over the course of the ten year period between 1997 and 2007, spending exceeded earnings levels across all sectors of the community, but was still most pronounced in the lower earning sectors of the UK. Many of these individuals also did not own their own home and therefore did not receive the benefit of property price increases.

Gavin Kelly of Resolution said “We all know that the loan debt position of households grew starkly worse in the run up to the financial crisis. But what this report exposes is the dramatic difference for lower income households who were way outspending their incomes by 2007. Looking to the future, we need growth that is sustained by gains spread across the whole income distribution, not ever more loan debt for those on the lowest incomes.”

A new survey has found that the biggest obstacle facing potential home buyers is that of being accepted for a suitable homer owner loan or mortgage. Much tougher lending criteria from banks and building societies has led to many people not being able to get the loan they require, or thought they would be able to get easily.

The report which was published by Quick Move, has revealed that 30.32 per cent of all potential house purchases for the month of April this year have fallen through, meaning that almost one in three purchases an home owner loans fail to complete.

Quick Move have said that the biggest reason for house sales not completing was due to a lack of finance and the purchaser not being able to get the home owner loan they required.

This can have a disastrous effect on house sales overall, due to the fact that if just one person in a large chain of property transactions is unable to get the loan they require, then the whole chain of sales could potentially collapse.

Donna Houguez of Quick Move said “The fall through rate for January to April in the years 2006 to 2011 proved changeable, whereas this year, fall through rate have barely altered thus far. It will be interesting to see whether fall through levels deviate from 30 per cent over the coming months or whether this is a longer term stagnation.”

Although the government is introducing various schemes and placing pressure on banks to offer business loans to small and medium sized firms, the latest figures from the Bank of England have revealed that business loans have actually reduced by around 3.5 per cent since the same time twelve months ago.

However, the secured loan broker Borro, has actually seen their average business loan size increase over the first three months of this year, by around 17 per cent, from an average loan amount of £17,000 to £20,000.

Borro take an alternative view towards secured loans and will allow personal assets of the borrowers, other than their main home, to be used as security for the loan. This means that borrowers re able to take out a secured loan which is secured on things such as works of art, jewellery, cars or antiques, for example.

This approach clearly appeals to many business owners and self employed people who would most likely be rejected for a business loan from a main high street bank, but are now able to access the loan they require through alternative methods.

Paul Aitken of Borro said “This group makes up over 60 per cent of our customer base and their average loan value has increased by 17 per cent from £17,000 to £20,000 in the first three months of this year alone. The average loan term is between four and five months, with prestige cars, fine art and antiques being the typical assets used as collateral.”

“Our lending to small business owners and the self employed is growing, proof that alternative forms of financing are becoming more mainstream.”

Despite the government introducing new schemes to try and help first time buyers get onto the housing and home owner loan market, the number of first time buyers taking out loans of less than £125,000 fell by 5 per cent in April this year compared with the previous month and was 1.2 per cent lower than loan numbers at the same time last year.

The news comes from e surv, who say that new loans for smaller amounts fell to just 11,307 throughout the month of April this year.
One of the hardest hit areas of this market was that of loans requiring a high loan to value product, as lenders are starting to restrict high loan to value lending. The total number of new home owner loans with a deposit of less than 15 per cent fell to just 5,309 in April, significantly below the 6 month average of 6,229.

Whilst smaller loans to first time buyers have been reducing in number, it would appear that lenders are now happier offering larger loans to wealthier individuals on expensive properties, as these present less risk than first time buyer loans.

Richard Sexton of e surv commented on the figures, he said “Banks and building societies can not afford to sustain their current levels of high loan to value lending. In addition to their increased funding costs, they are also concerned about their exposure to the debt ridden European countries and the increasingly precarious state of borrower finances in the UK.”

The news came as no surprise to anyone, as the Monetary Policy Committee (MPC) took the decision during their regular monthly meeting to keep the base rate on hold at just 0.5 per cent. The base rate for loans and savings has now been held at this historically low level since March 2009, when the MPC reduced the rate from 1 per cent.

 The MPC also announced that it would not be increasing the current level of quantitative easing (QE), which is designed to help inject capital into the economy and allow banks to offer more loans to individuals and businesses. The current level of QE remains at £325 billion.

The current stability in the Bank of England base rate is not reflected in the rest of the loans market however, as many banks and building societies are currently increasing their standard variable rates on new and existing home owner loans, encouraging many borrowers who were previously happy with their standard rate loan, to shop around for a cheaper loan deal.

At the same time as this, the top providers of unsecured loans are currently in a battle to see who can offer the best cheap loan deal, with interest rates on unsecured loans falling to their lowest level in some years.

Ray Boulger of John Charcoal home owner loan brokers said “In terms of whether any policy action was required today, MPC members are unlikely to have spent much time discussing whether to change base rate.”

“The only decisions requiring any serious consideration were whether to add to the current £325 billion of QE and what comments to record in order to pad out the minutes.”

The latest figures from the Finance and Leasing Association (FLA) have shown that there has been a steady improvement in the take up of consumer credit products in the first three months of this year. This includes things like unsecured loans, credit cards, store cards and car loans.

The amount of unsecured personal loans and other consumer credit offered to individuals saw an increase of around 9 per cent during the month of March this year, compared with the same period twelve months ago.

Car loan sales have remained fairly strong, even throughout the down turn and have been the one area of unsecured loans which has performed consistently in recent years, but there was even an increase of around 22 per cent in car loans over the same time last year.

The figures have shown that FLA members offered £5.5 billion worth of loans and credit to consumers in March this year, with £2.8 billion of this figure being lent on credit cards and unsecured loans. This shows an increase of 2 per cent above March twelve months ago.

The only area of consumer credit to see a fall was in store cards, which saw a reduction of around 12 per cent to just £116 million.

Fiona Hoyle of the FLA said “Our figures show a slight rise in most markets, which suggests that consumer confidence is showing signs of a tentative return. But many consumers continue to be cautious, reinforcing the need for the government to make sure that their proposed changes to consumer credit regulation do not limit the supply of affordable, responsibly provided, loans and credit.”

There have been many complaints from firms, that banks are not prepared to offer business loans at reasonable interest rates and many have simply been rejected for the business loan they require to allow their company to function or expand.

Around 80 per cent of all business loans in the UK have been provided by just four of the main high street banks and although banks have offered around £74.5 billion worth of business loans to small and medium sized firms over the past twelve months, this is still short of the government’s target figure of £76 billion which was agreed under project Merlin.

With new regulatory requirements being introduced for banks, which require them to hold more liquid assets and reduce their overall risk levels on loans, it is likely to make it even harder for banks to be able to offer competitive business loans and the government predicts a lending shortfall in small business loans of somewhere in the region of £191 billion over the course of the next five years.

In order to try and combat this problem, the government is introducing a number of schemes to try and help small firms get the business loan they need, including an announcement in the recent budget that £100 million would be made available for loans through non traditional channels.

The government has also launched the Enterprise Finance Guarantee scheme, which will provide an initial amount of £20 billion to help underwrite business loans through traditional banks up to 75 per cent of the loan amount, thereby reducing the risk placed on the bank providing the loan. 

The total amount of new loans across the whole of the loans market increased by £1.4 billion throughout March, which shows an increase over the six month average figure of just £1.3 billion.

Within these figures, secured loans on properties saw the biggest number of new loans, with new home owner loan and mortgage sales increasing by around £1.0 billion, to a total of £12.7 billion worth of new loans for the month.

The secured loans market saw an increase during March, both in new loans for house purchase, as well as re mortgage cases, as borrowers look to switch their loan to a better deal, in the wake of many lenders increasing their standard variable rate on existing loans. However, despite increase for the month, home owner loan sales were still down on the six month average figure.

In other areas, consumer credit lending which includes unsecured loans and credit card lending, also increased by £0.4 billion during the month of March, showing a slight increase above the previous six month average figure for this sector of £0.3 billion.

Within this figure, unsecured loan lending increased by £0.2 billion and lending on credit cards also increased by the same amount.

Paul Aitken of the loan broker Borro, commented on the figures, he said “Today’s data from the Bank of England reveals that new loans to individuals has risen by £1.4 billion in March, compared with the previous six month average figure of £1.3 billion. With figures for lending rising, this is of course somewhat good news to consumers, who appear to be able to access more loans and credit.”

The latest figures from the equity release loan specialist, Key Retirement Solutions (KRS) have shown that sales of equity release loans have increased yet further over the course of the first three months of this year.

The figures reveal that there were £217.1 million worth of new equity release loans taken out within the first three months of this year, with a total of 4,508 new loan cases, up from 4,237 at the same period twelve month ago, an increases of 6.4 per cent.

KRS have commented that more and more people are now taking their equity loans in a drawdown form, rather than a single lump sum, which suggests borrowers are now more concerned about taking the loan for their own purposes, rather than to help their family with their loans.

If all the drawdown loan cases had been taken in the form of a lump sum loan, KRS estimate that total lending would have exceeded £300 million over this period.

The current state of the economy in the UK is helping to drive the growth in equity release loans at the moment, as many retired people are not receiving the returns they expected from their pension planning and various investments.

However, the research shows that around one in four equity release loans are taken out for the benefit of family members who are struggling with their loans and finances.

Dean Mirfin of KRS said “As the return to recession hits home for those on a fixed income, it comes as no surprise that over the first quarter of this year we have seen a further increase in the levels of equity being released, importantly the increase in the levels of drawdown are significant allowing greater flexibility for borrowers.”

The consumer group Which? has estimated that the recent round of rate increase on loans is likely to cost home owner loan customers somewhere in the region of £300 million in increased loan repayments over the course  the next twelve months.

In a recent survey by Which?, around three quarters of home owner loan customers said that an increase of £50 per month in their loan repayments would have an impact on their lifestyle and many are concerned about the possibility of a rate rise in the near future.

Around 14 per cent of those interviewed said that they were already struggling to stay on top of their home owner repayments and other monthly bills and commitments. A further 20 per cent said that if their loan repayments increase by £100 per month, they would not have enough disposable income left over to pay for essentials such as food.

Whilst many borrowers may now be shopping around the market place for a better deal on their home owner loan, many people who took their loan out recently, or at a high loan to value, may not be able to obtain a better loan deal. Similarly, those with an interest only loan, or a self certification loan may now also be what has become known as “Mortgage prisoners”.

Peter Vicary- Smith of Which? said “Our advice to anyone struggling with their loan repayments is to speak to your lender straight away. It is encouraging that a third of people we spoke to had approached their lender, but worryingly in on in five cases, they said their lenders offered no help at all. This is just not good enough and we want to see banks do more to help customers who are struggling.”