We reported recently that the latest figures from the Bank of England have revealed that the interest rates being charged on current account overdrafts have reached an all time high at the moment, as high street banks continue to increase the cost of borrowing on overdrafts and personal loans in order to restore their balance sheets.

Despite these particularly high costs, a new survey has revealed that a growing number of individuals are using their overdraft on a regular basis, with some people even remaining in their overdraft facility on a constant basis.

The news comes from a survey conducted by Groupola.com, who found that around 78 per cent of UK consumers have an overdraft facility on their current account and somewhere in the region of 24 per cent of these said that they couldn’t cope without it. A further 18 per cent said that they were constantly overdrawn, with their main account always remaining in debt.

Research from Moneyfacts.co.uk also found that the average cost of an overdraft has increased by around 26 per cent over the course of the past eighteen months, yet many of those who use their facility on a regular basis had little or no idea of just how much they were being charged.

Although the cost of an unsecured personal loan has also increased dramatically over the past couple of years, for many people who are constantly within their overdraft facility, a debt consolidation loan could well be the answer.

A debt consolidation loan will almost certainly be a cheaper option than an overdraft and it will also structure the debt so that it is being repaid over a period of time, something which probably wouldn’t happen with an overdraft. By shopping around for a cheap loan deal, overdraft customers could potentially save themselves a lot of money over a relatively short time.

Over the course of the past three years or so, the personal loan market has remained particularly subdued, largely due to the effects of the credit crunch and banking crisis. Whilst unsecured loans have been affected, the secured loan market has almost ground to a halt, as borrowers have been less confident about securing loan debt on their home in the current economic conditions.

However, there are signs that the secured loan market is starting to improve and consumer confidence is returning to the market in general, according to one secured loan packaging company.

V Loans have reported that they have seen a significant increase in the number of individuals applying for secured loans in recent months, as the UK economy slowly starts to show signs of recovery and confidence returns from both borrowers and lenders with increasing loan to value ratios.

The number one reason for taking out a secured loan at the moment is still for debt consolidation, to repay more expensive unsecured loans and credit cards, but V loans say that a far more positive sign is that people are now taking out secured loans for things like family weddings and once in a lifetime holidays, for example.

This demonstrates that consumers are not just taking a new loan out of necessity to repay other debt, but are actually feeling confident enough about the future to start and treat themselves once again.

Marie Grundy of V Loans commented on the figures, she said “There is a long way to go before the economy is off the danger list but the evidence we are seeing points to an increasing level of confidence amongst the public.”

“Also more intermediaries are getting comfortable with recommending a secured loan because they are so simple, transparent and cost effective and provide borrowers with tailor made financing which does not interfere with their mortgage arrangements.”
 

Eighteen months ago, the Bank of England base rate of interest for loans and savings fell to its lowest level in the history of the Bank at just 0.5 per cent, where it has remained since. Yet, despite this particularly low base rate, interest rates on loans and unsecured loans in particular, have increased significantly over the same period.

Many potential borrowers may look at the Bank base rate before they apply for a new loan and think that they will be able to get a cheap loan with a low interest rate.

 But these individuals are likely to be shocked when they find that rates for an unsecured loan are often well above 10 per cent, even for borrowers with a clean credit history.

So why is this the case and why can’t banks and building societies offer cheap loans which compare favourably with the Bank of England base rate, rather than placing such a margin on their loan products?

In its latest three monthly bulletin, the Bank of England has offered an explanation to this often asked question and acknowledges the fact that whilst the base rate of interest has fallen so dramatically, the cost of some loan products has actually gone the other way and increased.

Although the base rate is extremely low, the cost to lenders of borrowing funds on the wholesale markets is more expensive and this, coupled with the fact that banks need to increase their capital reserves, has increased the cost of a typical loan.

In its statement, the Bank said “Lenders are seeking to rebuild net interest margins… in part through a higher mark up on new lending. This is consistent with lenders rebuilding capital through retained earnings, an important part of the ongoing adjustment process for the UK banking sector and a factor that should ultimately lead to lower funding costs.”

Since the start of the credit crunch three years ago and the following recession, it has become increasingly difficult for would be first time buyers to get their foot onto the bottom rung of the housing and home owner loan market, although a new survey has found that this has not discouraged people from wanting to own their own home.

The survey, which was conducted by YouGov on behalf of the Council of Mortgage Lenders (CML) found that, despite the uncertainty over the future of the UK economy and the lack of finance through affordable home owner loans, the numbers of individuals who dream of owning their own property has actually increased.

The survey found that around 85 per cent of those interviewed, said that they intended to be able to obtain a home owner loan and buy a property within the next ten years.

However a new report from the National Housing Federation (NHF) has shown that for the Average 21 year old who wants to buy a house, they are likely to have to wait until they are in their fifties before they will be able to afford a property and the repayments on a home owner loan or mortgage.

Both the CML and the NHF agree that although many young people have a desire to own property, the reality of the situation is that they will be unlikely to afford a home owner loan, or be able to meet lenders criteria on maximum loan to value ratios for a long time, unless they receive help from their family.

David Orr of the NHF said “This report highlights how home ownership is increasingly becoming a pipe dream rather than a reality for millions of young people without wealthy parents to support them and demonstrates again the scale of the country’s housing crisis.”

Since the start of the credit crunch and recent recession, there has been a dramatic increase in the number of people turning to expensive payday loans in order to see them through until their next salary cheque arrives, with some borrowers using this type of loan on a regular basis.

But there are now growing concerns about the number and amount of payday loans being taken out, with many individuals using them in order to maintain the repayments on other unsecured personal loans and credit card payments, due to not having sufficient disposable income to service their ongoing personal loan and debt commitments.

This, of course is leading many borrowers into a down hill spiral of uncontrollable debt as they take out a more expensive loan in order to keep up with the monthly repayments on a cheap loan.

Although payday loans are regularly marketed as a quick and easy way to obtain money over a short term, without many credit checks or long application forms to fill in, in fact they are one of the most expensive types of loan available on the market and although rates vary between lenders, APR’s (Annual Percentage Rates) often run into the hundreds of per cent, or even higher in some cases.

Whilst payday loans are intended as a short term loan for a couple of weeks or so until pay day, many borrowers are not clearing these debts and their loans are running over a longer period, or being rolled up into new loans, creating even worse debt problems for borrowers.

John Fairhurst of Payplan said “A payday loan might appear to provide a quick and straightforward solution, but we often see people drawn into repeatedly taking out these expensive loans to try and keep up with unaffordable repayments to other creditors. Instead of improving their situation, people often find that use of these loans exacerbates an already serious debt problem.”