Nicola Georgiou, Managing Director at Freedom Finance
At the end of 2015, lending to individuals was at its highest level since the start of the year – and as we move in to 2016, this trend of rising loan levels looks set to continue. In January, the Bank of England released its Money and Credit statistics which revealed that total lending to individuals had increased by £5.3billion in November, compared to the average monthly increase of £4.4 billion over the previous six months. Similarly, figures from the British Bankers’ Association (BBA) revealed that gross lending had reached £12.8 billion in November alone. Banks also lent more money through mortgages in the last quarter of 2015 than at any point in the last 7 years.
Many have speculated about what could be causing this continuing growth in lending. One explanation is that the number of personal loans has increased due to better credit availability for consumers. In addition, interest rates, which have been at historical lows for six years, and stronger household finances (the result of higher employment figures and a recovering economy) have helped fortify consumer confidence in borrowing.
At the same time, we’re now seeing a competitive ‘rate war’ between lenders, some of whom are now offering rates as low as 3.5% APR. The emergence of so-called challenger banks has fuelled this competition even further, thanks to a combination of competitive rates and innovative lending products, as well as more lenient lending criteria compared to traditional lenders.
Consequences of excessive borrowing
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Whilst it is encouraging to see consumers taking advantage of the competitive rates on offer, it’s also essential that borrowers are aware of the dangers of excessive borrowing. The Bank of England recently commented on this, and has implored policymakers to take action to prevent immoderate consumer borrowing as the economy continues to recover.
It is also important for borrowers to understand that the most attractive ‘headline’ rates are not always available to everyone. Some of the challenger banks may be offering loans with less stringent lending criteria, but most lenders will still only offer the lowest rates to those with very high credit scores.
Additionally, many consumers are unaware that shopping around and applying for various enticing loan deals can actually harm their overall chances of getting a loan, since this kind of activity can actually damage their credit scores. The alternative is to use ‘soft’ search sites which compare loan products that have been carefully matched to the borrower’s individual circumstances –without creating a digital ‘footprint’ that could jeopardise future applications.
Real products for real people
Whilst sites like these can offer a safe way for consumers to protect their credit scores when searching for loans online, it would actually be better to have more products that have been designed with atypical borrowers in mind. At the moment, some borrowers are struggling to access credit because of automated processing systems that rely upon very strict lending criteria, including minimum credit scores and other background checks.
The truth is that there are many reasons why people may have struggled with debt in the past. Along with low wages, tight budgets and unexpected bills, many unforeseen and life-changing events such as divorce or the death of a loved one can throw finances into disorder. These ‘victims of circumstance’ could benefit from innovative loan products that could offer a helping hand to those who have suffered genuine financial difficulties.
This kind of ‘circumstantial’ lending could help many people rebuild their finances, protect their credit ratings and gain access to products which would have previously been unavailable, with affordable loans that are tailored to suit their individual situation. Not only that, but these products would also benefit self-employed applicants – including Britain’s fast-growing army of freelancers and contractors – who also tend to be ill-served by most lenders.
Lending in 2016
The specialist lending industry is growing steadily, with brokers and lenders working together to deliver products that cover a broad range of financial circumstances. Responsible lending, including the need for more sensible loan-to-values (LTVs), must therefore remain at the forefront of the industry’s mind as we move into 2016.
This focus on affordability is continued with the introduction of the European Mortgage Credit Directive (EMCD) which comes into play on the 21st of March 2016. The EMCD was announced in 2014 as a Europe-wide regulatory framework to protect consumers taking out credit agreements relating to immovable residential property. This directive is a big step in the right direction for the way loans are underwritten and ensures that all consumers who purchase a property, or who take out a loan secured against one, are adequately informed and protected against the risks.
The New Year is also likely see rising interest rates, even if these increases are likely to be gradual and limited compared to past norms. The Council of Mortgage Lenders has predicted that the ‘overwhelming majority of borrowers will cope with the modest interest rate increases’ at the start of 2016, yet lenders and borrowers must continue to be cautious when dealing with a still fragile market.
The lending industry has clearly seen many successes in 2015, most notably the rise in consumer confidence. Going forward, we should capitalise on these advances by ensuring that the lending industry remains consumer-focused, so that those without perfect credit scores are not forgotten. In order to achieve this goal, however, lenders and borrowers will need to work together to consider all their options available, so that every loan offered is designed to meet each consumer’s individual needs.