Debt and the Changing Face of the Credit Market

Tagged: Debt, Loan, Loans

Food prices up, repossessions up, house prices down… these are troublesome times, especially for people whose monthly debt repayments are taking up valuable funds they need to cope with the ever-increasing cost of living.

After years of easy access to credit, many households have grown used to the idea that they can consolidate their debts, effectively spreading their repayments out over a number of years to reduce their monthly repayments. It may end up costing more, but it’s a tried-and-tested way of making debt repayments more manageable, keeping debts from snowballing into a serious debt problem.

Today, however, the credit market has changed, as the Bank of England’s latest Credit Conditions Survey proves. Covering (among other things) secured and unsecured lending to households, the Survey shows what lenders in the UK have noticed in the last three months, and what they expect to see in the next three.

In 2008’s Q2 Survey, lenders revealed that they’d reduced the availability of both secured credit (from secured loans to mortgages) and unsecured credit (from credit cards to unsecured loans). What’s more, they expected to see further declines in the availability of both secured and unsecured credit in the next three months.

For secured loans and other secured credit, Q2 seems to have seen the worst actual reduction in availability (around 45%). Availability is expected to go down in Q3 as well, but by only about half as much.

The availability of unsecured loans and other forms of unsecured credit came down by around 25% in Q2, and it’s expected to drop slightly more than that in Q3.

For secured loans and unsecured loans alike, lenders are basically tightening their credit scoring criteria, which means they may well refuse loans which they would have granted a year or so ago.

When it comes to secured loans, they’re also ‘decreasing maximum loan to value (LTV) ratios’, which means they’re being more cautious about securing loans against the value of a property. According to the Nationwide House Price Index, the typical house is worth £15,000 less than it was a year ago, so it’s difficult to be sure how much equity a homeowner will actually own 12 months from now.

There’s no question that this is worrying news for people who were thinking of consolidating their debts. Now that lenders have become so much more cautious about lending money, there’s no guarantee that they’ll be able to get a consolidation loan (either secured or unsecured).

However, it’s important to realise that loans – both secured and unsecured – are by no means unavailable. It’s true that some people may find it difficult to find the debt consolidation loan they need, but it’s often a case of finding a loan provider who specialises in helping people in their financial situation.

Plus, a consolidation loan isn’t always the best debt solution anyway. Many people in debt would be better off with a debt management plan, an IVA (Individual Voluntary Arrangement) or a protected Trust Deed (for residents of Scotland only).

Each debt solution comes with its own distinct benefits and drawbacks, and identifying the most appropriate solution requires an in-depth understanding of the credit market, as well as the of debt solutions themselves. It’s never advisable to choose a debt solution without first talking to an impartial debt adviser who can explain the details of each and recommend the most appropriate one(s).

To read more about different debt solutions such as debt consolidation & IVAs, visit www.thinkmoney.com