Vultures And Victims

Has anyone noticed how many loan companies now fill up the
commercial breaks? Sofa, after of sofa of happy couples are
shown, with carefully manipulated stereotypes discussing the
consolidation of their finances, recommending a particular
provider. Couples, who have had loan requests knocked back from
the standard, high street or traditional credit lenders, find
themselves turning to alternative finance providers in the hope
that they can move their debt situations forward.



According to the Joseph Rowntree Foundation, there is
increasing concern that UK consumers are assuming unmanageable
amounts of debt, which may become a precarious situation should
interest rates rise or if the relatively stable macroeconomic
climate takes a turn for the worst. Despite these concerns, the
Foundation asserts:



"Even a casual observer of the financial scene in the UK will
have been struck by the increased marketing of products -
including mortgages and remortgages, car loans and debt
consolidation loans - specifically to people who have an
impaired credit record or who are finding their existing debt
difficult to mange. It might be predicted that such borrowers
would be particularly vulnerable to unmanageable debt."



Lending to people with an impaired credit record is typically
called sub-prime lending, a term more familiar with people in
the US, than the UK. A number of lenders have entered this
market who target their products to a customer market branded
sub-prime, non-conforming or non status. In the US, this market
is significantly more established and a lot of the US companies
operating in this field are now marketing their products in the
UK. The sheer size of the prime and sub-prime lender UK market
led it to be labelled the most 'complete' in the world by the
Miles review in 2004.



High street 'prime' lenders tend to operate under strict
requirements and guidelines, seeking 'prime' customers based on
criteria such as:



* Past evidence of a good repayment record
* Good personal characteristics (stable employment, income
level, registered on electoral register)



The prime lending system excludes many who wish to borrow and
may be able to repay the loans, but are not awarded the
required credit score. The Joseph Rowntree Foundation reported
that more than 25% of general credit applications and over 30%
of mortgage applications are turned down because the standard
criteria cannot be met, based on research by the Council of
Mortgage Lenders in 2002.



The type of credit offered to sub-prime borrowers is called
adverse credit. Adverse credit is available in a variety of
forms including:



* Adverse loans (incorporating debt consolidation loans)
* Adverse mortgages or non-standard mortgages (encompassing
first mortgages for sub-prime borrowers and remortgages for
sub-prime borrowers)
* Adverse credit cards



All adverse credit products impose higher rates of interest on
the borrower. Some of these financial products have been set up
to genuinely help consumers that have fallen out of the
mainstream assistance offered by high street banks. Yet there
is growing concern, that if sub-prime borrowers do not do their
homework on the options available to them, they become even more
vulnerable.



Websites such as the personal finance research specialist
Moneynet http://www.moneynet.co.uk provide extensive
information on the different adverse credit products available,
including adverse loans, adverse credit cards and non-standard
mortgages. Many sub-prime borrowers who hold adverse credit
cards complain of unduly high APRs, according to the Joseph
Rowntree Foundation. These borrowers also complain that initial
discounted rates are subsequently dropped following a single
late repayment. It is a breach of the Consumer Credit Act to
increase the rate of interest on default of repayments, but
some sub-prime lenders get round this legislation by imposing a
discounted rate which simply reverts to a 'normal' rate on
default.



The report by the Joseph Rowntree Foundation provides an
insight into the vastly inflated interest rates on some secured
debt consolidation loans and unsecured debt consolidation loans,
including some truly appalling horror stories from people who
had failed to shop around for the best deal and neglected to
read the small print.



Resources:
http://www.jrf.org.uk/knowledge/findings/housing/0275.asp
Joseph Rowntree Foundation
http://www.moneynet.co.uk/ Moneynet
http://www.creditaction.org.uk/ Credit Action
http://www.citizensadvice.co.uk/ Citizens Advice BureauRachel writes for the personal finance blog
Cashzilla. http://www.cashzilla.co.uk Cashzilla is a mighty
personalfinanosaurus: a fiery beast with plenty of opinions on
personal finance issues. "Rachel" means "sheep" in Hebrew

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