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.”

There has been much talk over the course of recent months regarding the growing problem of interest only home owner loans and mortgages, as more and more of these loans approach their maturity date without the borrower having any method of being able to repay the loan.

The problem seems to be most marked amongst retired people over the age of 65, whose loans are fast approaching the time when they should be paid off, yet many retirees are still making monthly payments on their home owner loan, at a time when they should be free of any loan debts.

A survey of retired people by the equity release loan provider, More 2 Life, has revealed the scale of the interest only loan problem amongst the over 65’s, with those individuals who still have an outstanding loan balance, having an average loan debt of around £43,000.

More 2 Life is trying to convince the Financial Services Authority that there needs to be a warning system in place for those with interest only loans who find themselves in this position, similar to the system used with endowment policies alongside home owner loans, with red, amber and green warnings.

This would draw attention to the problem and allow borrowers to do something about it before their loan reaches the eventual maturity date.

Jon King of More 2 Life said “The interest only loan time bomb is purely and simply about the looming repayment date for mortgages and loans. Customers can pay the interest but they need to find substantial sums to clear the capital borrowed.”

“The concern is that people hope for the best which is why regular warning letters from lenders will help concentrate customer’s minds. Lenders themselves already acknowledge it is a major issue and many are concerned.”

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.”

Back in the days of easy loans and finance, before the effects of the credit crunch and banking crisis hit the UK economy and loans market as a whole, it was not really that much of a problem to get a personal loan, even for someone with a poor credit history who required a specialised bad credit loan.

However, this situation changed rapidly following the credit crunch. Banks and building societies became reluctant to offer loans even to people with a perfect credit history, let alone to someone who may have a County Court Judgement (CCJ) or have missed a couple of repayments on an existing personal loan.

Although the situation has remained desperate for many potential borrowers with some form of adverse credit who may be looking for a suitable bad credit loan, over the course of recent months the loans market has started to relax its lending criteria slightly, particularly when it comes to things like loan to value on a secured loan and some small amount of bad credit in the past.

Shawbrook Bank, who are fairly new to the secured loans market, have just announced however, that they are to launch a new secured loan product in the bad credit loan sector, which will accept borrowers who may even have an Individual Voluntary Arrangement (IVA) on their existing loans and personal debts.

Loan rates on the new product will start from 11.9 per cent, depending on the loan amount and nature of the adverse credit and will allow a loan to value of up to 80 per cent.

Maeve Ward, of Shawbrook bank said “This market is underserviced and other lenders tend to shy away from offering a competitive loan solution for clients. At Shawbrook, we take the time to understand and assess the needs of clients as well as identify gaps in the market.”

Back in August last year, the Government introduced its Funding for Lending scheme, which was designed to give a boost to the loan industry in the UK by providing cheap loans to banks and building societies, which could be used to pass the savings on to loan customers of the lenders.

Whilst this seems to have been successful within the banking sector of the UK loans market, with a wider range of cheap loan deals now available at higher loan to value ratios for secured loans, the scheme also seems to have had a knock on effect in other areas of the loans market, according to one peer to peer loan company.

The peer to peer loan company, RateSetter, has announced that it arranged a record number of loans through its organisation last month and has said that it believes this is due to the effects of the Funding for Lending scheme.

RateSetter was launched back in October 2010 and in January this year it completed £6.8 million worth of new loans, which shows a 100 per cent increase on any previous month since the company was formed.

It seems that this has been a trend throughout the peer to peer loan market, with most peer to peer lenders seeing an increase in loan numbers during January. Overall peer to peer loan companies arranged around £20 million of new peer to peer loans in the UK.

Rhydian Lewis of RateSetter said “Funding for Lending seems to be achieving what the government wanted in terms of getting funds flowing into home owner loans and mortgages, which is great news for borrowers but, on the other side, it has meant savings rates have plummeted as banks replace their retail funding with Government funding. The reduction in savings rates has led people to look at peer to peer lending.”