The effects of the credit crunch over the course of the past three years has meant that consumers are finding it much harder to make ends meet financially every month and are struggling to obtain the personal loan they require, due to tougher lending criteria from traditional loan companies, such as banks.

These factors have lead to a dramatic increase in the number of people applying for Payday loans, which are short term loans for small amounts of money, designed to see individuals through to their next pay day by effectively giving them an advance on their next salary cheque.

In many cases, borrowers write a post dated cheque to the lender to cover the amount of the loan on their next payday, or set up a direct payment form their bank account once their salary has been paid in.

New research from Consumer Focus, has found that the number of applications for payday loans has increased by around four times over the course of the past four years, as a growing number of consumers depend on them every month.

A typical loan of this kind is likely to charge somewhere in the region of £20 for every £100 borrowed and although this may not sound like an awful lot, it is normally over a short term, often only a week or two.

These interest charges equate to an APR (Annual Percentage Rate) of between 1000 and 2000 per cent on the loan.

The survey found that an average payday loan last year was for an amount of just £294 and people who used them were taking out around 3.5 loans of this type every year.

Consumer Focus have called on new regulation for payday loans in order to protect those borrowers who use them, although they have said that they should not be banned altogether, as this could drive borrowers into the clutches of illegal loan sharks.

Over the course of the year to date, the interest rates being charged by banks and building societies on their home owner loan and mortgage products has generally been steadily decreasing, as competition increases between lenders and the cost of borrowing funds on the wholesale money markets have fallen.

However, a new report from Moneyfacts, has highlighted that the margins charged by lenders on home owner loans is at the highest level it has ever been. That is the difference between the rate at which banks are able to borrow money and the rate at which they lend it out at.

The latest figures show that this week the margin on a typical two year fixed rate loan deal was 3.29 per cent above swap rates, the lending rate on the wholesale money market. Two years ago, this difference was just 1.28 per cent.

Although the cost of borrowing money on the wholesale market is at the lowest it has been for a long time, banks are making a higher profit margin on new home owner loan than they ever have done in the past.

The main reason for this large difference in pricing is due to the fact that lenders are still trying to repair their balance sheets and build up their own funds once more, following the effects of the credit crunch, which means that those borrowers taking out a new loan with the bank are effectively paying an additional premium for that lender’s bad financial planning in the past.

 Michelle Slade at Moneyfacts said “Mortgage rates are falling, but only at a fraction of the reduced funding cost is being passed on as lenders continue to repair their balance sheets. The mortgage rates on offer at present are typical of what borrowers would expect to pay when bank rate was higher.”

Despite the fact that the UK is now officially out of recession, many individuals are still struggling to manage their finances and keep up with the repayments on their personal loans, credit cards and other debts and it appears that the situation is actually getting worse rather than better.

Easy loan acceptance and irresponsible lending and borrowing prior to the credit crunch, has placed many individuals in the position where they simply can no longer afford to make their loan repayments each month and many are finding themselves in a downward spiral of uncontrollable debt.

A recent survey conducted by Mintel found that around 40 per cent of consumers now say that they are more careful about their finances and any loans they take out, following the credit crunch.

However, the same survey also discovered that somewhere in the region of 1.5 million individuals in the UK are having extreme difficulty with their finances and a growing number of borrowers have missed at least one repayment on a personal loan or credit card.

As a result of this rising debt problem, more and more borrowers are finally seeking professional help from a debt adviser, or debt management company. One such firm say that they have seen an increase of around 22 per cent in the number of calls from consumers looking for help with their personal loans and other debts.

Although more people are seeking professional help, many are leaving it too late before they take action. Debt problems are much harder to rectify once a high level of loan arrears and missed payments have already built up.

The sooner someone looks for help with their debts, the quicker and easier it will be to resolve the problem and get them back on an even financial footing.

As the UK limps slowly out of recession and the recent credit crunch, new fears are growing for the future of the country, following the announcements by the new coalition government regarding public sector job cuts and what effect this will have on those individuals who are already struggling with personal loan and credit card debt.

The anticipated job cuts have been blamed squarely on the previous Labour Government and years of overspending, but this will be little comfort for the thousands of individuals who may become unemployed as a result of the cuts and still need to be able to make their loan repayments every month.

The Chartered Institute of Personnel and Development (CIPD) has warned that it is not only public sector workers who are likely to be affected, but the cuts will have a knock on effect in other areas of employment, which could push many individuals into the position of building up an increasing level of personal loan and credit card arrears and eventual bad debt.

A large proportion of the population are already struggling to keep on top of their monthly repayments on personal loans and credit cards and a loss of income, even for a short period, could tip them over the edge, leaving them with adverse credit through loan arrears and the prospect of County Court Judgements (CCJ’s) or even worse.

One expert in personal loan debt management commented on the worrying situation for many borrowers. Steven Jackson of Beatmydebt.com said “When the full extent of the government cuts begin to bite, we will see very many families with increasing financial difficulties. This is going to lead to a big increase in the number of people suffering with serious debt problems.”

Taking out a small unsecured personal loan for an amount less than £5,000 has always been an expensive way of borrowing money, even if the loan is from a reputable lender. But new figures have shown that the cost of a small unsecured loan is at its highest level for ten years.

The research from Moneysupermarket.com, has found that the typical cost of an unsecured loan for less than £5,000 has been increasing steadily to the point where a borrower is now likely to pay around 135 per cent more for a loan than they would have done for the same loan four years ago.

However, the cost of a larger loan, between £5,000 and £10,000 has actually come down over the same period, partially in line with reductions in the base rate of interest.

As a result of this, many people are actually now finding it cheaper to take out a larger cheap loan for more money than they actually require, rather than apply for a loan for less then £5,000, which is encouraging individuals to borrow more than they need, at a time when most people should really be borrowing less.

Tim Moss of Moneysupermarket.com said “The credit crunch has really impacted borrowers who are looking for smaller loans. Not only is it more difficult to get a loan, with many lenders tightening their approval criteria, those that do manage to get one will undoubtedly pay through the nose.”

“If you are financially stretched and in need of a loan, now is the time to play the banks at their own game and really use current provider rates to your advantage. By borrowing a bit more you can actually save yourself money without increasing the term or monthly repayments, which just shows how much the market has changed.”
“As with all products, it is vital to shop around to make sure you get the best deal and don’t be tempted to borrow more than you can really afford to pay back.”