There has been a lot of bad press aimed at the pay day loan industry and pay day loan firms in particular in recent months, with many horror stories about the high rates of interest on these short term loans and the unfair treatment of customers who take out this type of loan.
However, the Consumer Finance Association (CFA) the trade body who represents pay day loan companies, has hit back at critics of pay day loans and the government in particular, saying that politicians have given this sector of the personal loan industry a bad press, due to a misunderstanding of how pay day loans actually work.
The CFA recently carried out a survey amongst Pay Day Loan customers and the results showed that more than nine out of ten loan customers thought they had received good value for money and that their pay day loan lender had treat them with dignity and respect.
Pay day loan companies often charge around 25 per cent of the loan amount in fees, although these charges can spiral out of control if the loan is not repaid on time or any repayments are missed or late.
Despite this, 89 per cent of pay day loan customers in the survey said that they had had the charges explained to them clearly by the loan company before they took out the loan and were happy with the service they received from the lender.
John Lamidey, Chief Executive of the CFA said “pay day loans can be misunderstood by politicians concerned for the welfare of constituents in tough economic times.”
“This research shows that the people who actually use pay day loans are extremely satisfied with them at every level.”
There has been huge increase in the number of people applying for loans for property related purposes across the UK, from home improvement loans to bridging loans, according to the latest figures from one national loan broker.
The loan broker Borro, has said that it has seen an increase of around 661 per cent in the number of loan applications which are for property related purposes and it expects to see further increases of around 40 per cent over the course of the next twelve months, as borrowers continue to find difficulty in obtaining secured loans from traditional sources, such as bank loans.
Whilst most secured loans will only accept property as the security for a loan, Borro are prepared to accept other assets as security for the loan, which can be particularly beneficial for those home owners with a low level of equity in their home, who might not be able to get a high loan to value deal.
Borro say that one in seven loan applications they receive is for property related purposes, with the main reasons being home improvement loans, covering the cost of a second property before it is sold and bridging loans.
Paul Aitken of Borro said “The rise in property related applications in the last year suggests that some people out there are finding it hard to secure a loan in this area from traditional sources such as banks.”
“They need a solution over a short period and may are turning to their existing assets to help with that. For example, one customer borrowed £6,000 against a valuable jewellery collection to cover the costs of a property that she was struggling to sell after development. Another took out a £21,000 loan against a boat for work on a listed building.”
With the home owner loan market becoming even tighter on lending criteria at the moment, a growing number of people with large home owner loans, interest only loans, or low levels of equity in their property are unable to consider a re mortgage on their property to raise cash funds for the things they need.
A high percentage of this type of borrower has now been categorised and labelled as “mortgage prisoners”, due to the fact that they have become trapped in their existing home owner loan deal, which in many cases, they took out prior to the credit crunch, when it was much easier to get the loan they required.
As an alternative to a re mortgage loan deal, more and more borrowers in this situation are now turning to secured loans, on a second charge loan basis, in order to raise the capital they need to fund their various projects.
The news comes from the secured loan broker, V Loans, who say that they have seen a significant increase in the number of financial advisers and loan brokers introducing their clients to them for a secured loan as an alternative to a re mortgage.
V Loans have estimated that due to new regulation on mortgage loans from the FSA, including things like reduce loan to value levels and a practical ban on self certification loans, somewhere in the region of 5 million home owners could be trapped in their current loan deal.
Dave Pinnington of V Loans said “We have been surprised by the number of calls we are already getting from brokers, who have never done a secured loan before, because of the restrictions that are already beginning to bit in the mortgage and home owner loan market.”
As people are slowly returning to the housing and home owner market, one of the biggest questions for new borrowers is whether they should take out a fixed rate loan whilst rates are cheap, or should they opt for a tracker rate loan, which I the cheap loan option at the moment, but could increase if interest rates rise.
Although most experts believe that the Bank of England base rate will remain at 0.5 per cent for the foreseeable future, giving us cheap loans for a while, rates could increase at any time in order to bring down the rate of inflation in the UK.
Whilst the choice of a fixed rate loan will give the borrower peace of mind that their loan repayments will not increase during he fixed period, this type of loan is likely to charge a premium for such a benefit, which could leave a borrower out of pocket if loan rates do not increase.
On the other hand, a tracker rate loan offers a good cheap loan option at the moment, but this will increase straight away if the base rate should increase.
As many fixed and tracker rate loan deals only run for two years before they revert to the standard variable rate, the argument as to whether a fixed or tracker deal is the best loan deal could be academic, as interest rates may not increase until the original deal has ended.
Long term deals on either fixed or tracker loan rates could be the best loan option, however, lenders are hedging their bets on base rates, with long term loan deals only accounting for around 2 per cent of the overall home owner loan market, whereas two year fixed rate loan deals now account for around30 per cent of the home owner loan market.
The amount of money being advanced on new home owner loans has increased dramatically over the month of March this year, as buyers have rushed to beat the deadline for the end of the stamp duty holiday, according to the latest figures from the Council of Mortgage Lenders (CML).
The latest figures from the trade body have shown that total gross lending for March this year stood at £13.4 billion worth on new loans, which shows a 17 per cent increase in loans from the same time last year, when the figure was just £11.4 billion.
The number and amount of new home owner loans being issued has steadily increased over the course of the first three months of this year, as first time buyers rushed to get on to the housing and home owner loan market and take advantage of the stamp duty holiday before it expired t the end of March.
The stamp duty holiday only applied to first time buyers who were purchasing a property for a value of up to £250,000, which means that thy could make a potential saving on tax of up to £2,500, which could then be put towards the cost of their deposit, home owner loan or other fees.
Bob Pannell of the CML said “The increase in our March lending estimate appears to be almost entirely due to stronger house purchase activity. The most likely explanation is that buyers wanted to complete their loans before the end of the stamp duty concession on 24th March.”
“However, we would be surprised if we did not see a drop in transactions over the next few months, following the end of the stamp duty concession, especially as it will take some while for NewBuy transaction levels to build.”