As the personal loans and unsecured loan markets starts to see some signs of recovery and lenders are beginning to offer competitive deals on their loan products once again, the net result has been particularly good news for potential borrowers who may be looking for a new cheap loan deal.
Interest rates on personal loans in the unsecured loans market have dropped significantly over the course of the past couple of years, with some of the most competitive loan deals being in the £7,500 to £15,000 loan amount bracket, although there have been price reductions across the board.
New research from Moneyfacts.co.uk has found that the average interest rate on an unsecured loan of £5,000 over a term of three years has dropped from 12.5 per cent back in March 2011, to just 11.8 per cent today.
Twelve months ago, the best deal on offer for a cheap loan of £5,000 over three years was a rate of 7.9 per cent and the best loan deal over a two year term stood at a rate of 8.4 per cent. However, this has now fallen to just 6.8 per cent for the best current loan deal over this term.
The Moneyfacts survey also highlighted the best loan deals which are currently available on the market for an unsecured loan of £5,000. The best loan deal was from Hitachi Capital, which advertises a starting rate of just 6.8 per cent for a personal loan. This is closely followed by Sainsbury’s Bank, M&S Bank, Santander and the Clydesdale Bank.
Of course, these advertised loan rates are only available to those borrowers with a perfect credit rating and the actual interest rate charged on a personal loan will depend largely on the personal circumstances and credit rating of the individual who applies for the loan.
The consumer credit market, which includes things such as unsecured loans, overdrafts, in store credit and credit cards, has seen a slight growth in borrowing levels during the month of January, according to the trade body for the loan industry.
The latest figures from the Finance and Leasing Association (FLA) have shown that the level of unsecured loans and consumer credit increased by around 1 per cent throughout the month of January this year, compared with the same period twelve months ago.
The highest growth area within the market was is car loans and new car finance deals, followed by second charge mortgages or secured loans and store instalment credit and loans.
The secured loans market saw its highest level of growth since October last year, with the total number of new secured loans growing by 14 per cent in number and around 30 per cent by outstanding loan amount, compared with loan figured for the same period twelve months ago.
The growth in the UK loans market and the support it is providing for the UK economy as a whole, places even more pressure on the new financial regulator, when it is designing the new legislation which will come into force for the whole of the UK loans market next year.
Stephen Sklaroff from the FLA commented on the timetable for the proposed regulation, he said “The loans market contributes £260 billion to the UK economy annually. Millions of people rely on loans and finance for everything from the car in their driveway to the sofa they sit on each evening. Tens of thousands of high street stores, motor dealers and lenders which provide the loans and credit, need a realistic timeframe in which to prepare for the new regulatory regime.”
The pay day loan industry has been under a lot of criticism for some time now, due to the high cost of loans and especially the high penalty charges on late payments and loan arrears, along with irresponsible lending practices, which have left many people with spiralling debts as a result of pay day loans.
Following lengthy investigations and reports, the Office of Fair Trading (OFT) has finally been given more powers to deal with loan companies who may be causing harm to consumers and as a result, the regulator has issued an ultimatum to pay day loan firms across the UK.
The OFT has given the top 50 pay day loan firms, which account for around 90 per cent of the pay day loan market, a deadline of twelve weeks to change their business practices, or face losing their Consumer Credit Licences and being shut down.
It has also been proposed that the pay day loan market is referred to the Competition Commission after the OFT found problems in how loan companies competed against each other.
It was found that firms are competing on the basis of speed of acceptance for a new pay day loan, rather than on the basis of the cost of a loan and that there is too much reliance on rolling over existing pay day loans into new loans, thereby increasing the cost even further.
Other problems include: loan companies failing to assess affordability before offering a new loan, failure to explain how payments are collected, using aggressive loan debt collection techniques and not treating loan customers in financial difficulty with forbearance.
The OFT has stated that these problems “go beyond non compliance with the law and regulations and that a full investigation by the Competition Commission is needed to identify and, if appropriate, impose lasting solutions to make this market serve its customers better.”
The Government is coming under growing pressure from one of the UK’s leading consumer groups to introduce tougher regulation for the loans industry in the country as a matter of urgency, due to the growing personal loan debt crisis being faced by many borrowers, particularly those with short term loans and credit.
The calls have come from the consumer group Which?, who say that the pay day loan and door step lender sector of the loans market in the UK has grown at an alarming rate over the course of the past couple of years, largely due to the lack of availability of mainstream loan products , such as bank loans and other cheap loan products.
Pay day loans and other similar short term loan products, such as door step loans, have far less regulation than a traditional bank loan and carry out fewer checks on borrowers to assess affordability of the loan, yet charges are much higher than any type of mainstream loan, with massive penalty charges for late or missed loan repayments or arrears.
A recent survey conducted by Which? raised additional concerns due to the fact that around 24 per cent of people who took out a pay day loan, used the money to pay for repayments on other personal loans or even their home owner loan or mortgage.
A spokesman for Which? said “For an increasing number of people, using credit to pay for essentials has become the norm. This has led to people being forced into a vicious cycle, taking out further expensive loans and credit, to pay off their existing loan debts. The new regulator, the Financial Conduct Authority due to come into being later this year, must be strong, proactive and willing to take action, especially against loan companies who are exploiting consumers.”
As banks, building societies and other traditional loan companies are still rather reluctant to offer loans to anyone other than those with a perfect credit history, more and more people are turning to alternative sources for a loan, such as a pay day loan or other short term loan option.
Not surprisingly, the number of people getting themselves into unmanageable debt problems through pay day loans has seen a huge increase as a result of the increased number of loan applications, with one loan debt help charity seeing an increase of around 94 per cent in the number of calls they receive regarding pay day loan debts.
National Debtline says it took more than 20,000 individual phone calls from consumers who were struggling with their pay day loans over the course of last year. Tis is almost double the number from the previous year, when they received 10,301 calls relating to pay day loans and only 465 separate calls back in 2007.
The loan debt charity has said that this rate of phone calls regarding pay day loan debts works out at around one phone call every seven minutes, when the phone lines are open.
It is not only the high interest rates on pay day loans which cause people problems, but also the additional charges and late payment penalties which are often added if the loan is not repaid on time and in some cases can work out to be more than the original loan amount itself.
Joana Elson of the Money Advice Trust said “Pay day loans have come from nowhere to be one of the most common debt problems people face. The rapid emergence of pay day loans has caught regulators a little off guard. We have waited some time for real action to be taken to help prevent people falling into a serious debt spiral with these loans.”