It is becoming more difficult to borrow money cheaply as banks clamp down on lending amid fears of growing household debt. It is still possible to get good deals, particularly on personal loans, but banks are warning that it will become increasingly hard to get loans or credit in the run-up to Christmas.
Lenders have told the Bank of England that over the summer they reduced the amount of unsecured credit — credit cards, overdrafts, car finance and personal loans, which are not secured against an asset in the way that a mortgage loan is secured against your house.
They also warn that they expect a “significant decrease” in lending for the rest of year as they tighten their criteria yet further and approve fewer loan and overdraft requests.
Charlotte Nelson, a spokeswoman for Moneyfacts says: “With extra scrutiny surrounding unsecured lending it is little surprise that we have seen lenders tightening up this area. In fact, the length of the best-paying balance transfer deals on credit cards has fallen from 43 months in May to 39 months today.”
The best credit-card transfer balance deal on May 4 was with MBNA, which offered 0 per cent interest for 43 months, with a 3.29 per cent transfer fee, before switching to an APR of 18.9 per cent. Today its best offer is 0 per cent for 39 months, with a 1.99 per cent fee, before switching to an APR of 19.9 per cent.
Ms Nelson says: “Customers looking for a great deal will need to act fast to ensure that they get the best rate. As always though, borrowers should ensure that balances are paid off in full before the interest free-period ends.”
Mark Dyason, the director at Thistle Finance, a lending broker, says: “What a spectacular U-turn by the banks on unsecured credit. Not so long ago they were lending left, right and centre at tantalising rates, and now they are turning the taps off.
“For consumers, money being as cheap as it has been is a double-edged sword. Initially it enables people to keep their heads above water, but then the rates on offer can encourage people to take on more than they can manage.”
Andrew Bailey, the chief executive of the Financial Conduct Authority, recently told City workers at the annual Mansion House dinner: “About five million people experience real difficulties in paying off their balance, and credit cards have become a source of long-term expensive debt. It is not untypical for such consumers to be paying around £2.50 in interest and charges for every pound they repay. Companies can lack incentives to tackle this because these customers are profitable.”
The Bank of England Credit Conditions Survey reports that defaults on credit cards increased slightly in the three months to the middle of September, while those on other unsecured loans “increased significantly”.
The latest debt figures published by UK Finance on Wednesday showed that Britons spent a record £17 billion on credit cards in August.
Alistair McQueen from Aviva, a financial service provider, says: “The level of credit card debt among the over-55s has reached a high, at an average of £1,052 per person. The Bank of England reports that the amount of unsecured credit from banks and building societies is expected to contract significantly in the coming three months. The level of contraction is at a scale not seen since the financial crisis of 2008 — mainly driven by fears about the health of the economy and a declining risk appetite among lenders.
“Britain is carrying £68.8 billion in credit card debt. This is a record high since reporting began in 1993. A contraction in supply of credit coupled with a possible increase in interest rates for the first time in more than a decade would represent a double-whammy for many households. Taking steps today, will help navigate choppy waters tomorrow.”
There are many who believe that the Bank of England could raise interest rates before Christmas. The base interest rate has been held at 0.25 per cent since August last year, however rising inflation is making a rate rise likely.
A tightening of loans by the banks coupled with an interest rate rise could create a debt crisis for many people. According to the Money Advice Service, almost half of us are in debt and the average amount owed is £4,374 (excluding student and home loans). However, Ms Nelson says that while good credit card offers are diminishing, personal loans are good value. “Loans have some of the best deals on record. However, with extra pressure on unsecured lending it is a question of when, not if, they rise.”
The best loans are with M&S and Sainsbury’s bank, which offer £7,500 over five years at 2.8 per cent APR.
The Bank of England survey says that secured lending, which includes mortgages, rose slightly in the three months to mid-September. UK Finance figures show that mortgage lending strengthened in August with first-time buyers taking 9 per cent more loans this year than last, people moving house taking out 13 per cent more loans and those remortgaging 5 per cent more. As we reported last month, there has been a 25 per cent surge in borrowers re-mortgaging to clear their debts.
Mr Dyason says: “With demand for credit still strong and unsecured loans harder to take out, it’s no surprise that we have seen an increase in borrowers turning to secured loans.
“While the rates are more competitive than they were pre-crisis people should always seek advice before entering into this type of finance.”