More people turning to costly and unsuitable finance solutions

The global credit crunch has created a myriad of problems for consumers looking to take out finance since it made its way to the UK last summer.

Originating in the sub-prime mortgage sector in the United States the credit crunch has now taken a hold in the UK’s financial market, affecting lenders’ abilities to provide finance and affecting consumers’ abilities to get the finance that they need.

All areas of the financial industry have been affected to some degree, including mortgages, credit cards, unsecured loans, and mortgages – the latter suffering more than most in the eyes of most people.

Lenders have really had to tighten up on their lending criteria, and credit conditions have become unbelievably tight over recent months. Lenders have had to become more stringent and strict over who they lend to, and many financial deals have been taken off the markets altogether.

With accessibility to finance so restricted, and with the cost of borrowing quickly rising, many consumers have found that they either cannot afford to get the finance that they are after or are not eligible to take out the finance.

All of this has led to many people having to look at other ways of raising finance. The whole situation has been made much worse by the fact that costs have been rapidly rising, and this has put increased strain on household finance.

In addition to the cost of borrowing going up despite three base rate cuts from the Bank of England since December, bills such as energy, water, and council tax have also shot up. To make matters worse there has also been a sharp rise in living costs with the cost of petrol rocketing and the cost of food rising fast.

For many people credit has become an essential financial lifeline in order to help them to stay afloat financially, with so many rising costs to cope with. But with access to credit so restricted it has become necessary for many people to look at alternative means of credit, and there are concerns amongst officials that some of these lines of credit may prove unsuitable and expensive for many consumers.

Doorstep lenders

Doorstep lenders have always charged extortionate rates of interest and have usually preyed on those with poor credit, low incomes, and little chance of getting finance through a mainstream lender. With an increasing number of people now unlikely to get finance through a mainstream lender there lenders are enjoying a booming trade.

In fact an official from one major doorstep lending firm in the UK recently said that he was expecting business to grow considerably over the remainder of this year, adding that business had already been very healthy in the first part of the year.

This suggests that an increasing number of people with low incomes or poor credit – who are the most likely to bear the brunt of the current tight credit conditions – are now turning to doorstep lenders.

However, most doorstep lenders charge incredible amounts of interest on these loans, and whilst consumers may be able to get the money that they need for the very short term they will end up paying dearly over the medium to long term.

An official from the Housing Corporation recently stated: ‘‘if you borrow from doorstep lenders, you risk the roof over your heads in return for a day’s happiness.” Another official added: “Doorstep lenders exploit poor families’ inability to get credit from more mainstream lenders, and they cover their risk in lending to the less well off by charging punitive interest rates.”

Payday loans

Another form of finance that seems to be more popular since the tighter credit conditions came into play are payday loans. These loans are short term loans for modest amounts, with most lenders offering up to £1000 subject to financial and employment status.

However, the loan needs to be repaid within 30 days in most cases, although some lenders offer the facility to roll the loan over by another month for a fee.

Since September of last year there has been a rise of over 55% in the number of payday loans being taken out, and this suggests that since the onset of the global credit crunch and the tightening of lending criteria an increasing number of consumers have found themselves turning to these shorter term loans.

However, the interest charges on these loans can be very high, although it is normally charged as a flat fee per £100 borrowed – e.g. £10 per £100 borrowed.

A more suitable alternative

Some officials have said that a more suitable and affordable alternative for those that need to take out finance but are struggling to get access to any affordable deals is a credit union loan. Local credit unions are able to offer affordable finance to consumers, and therefore it is well worth finding out about your local credit union in order to find out more about what’s available.

One official recently said: “Credit unions offer a great alternative to money shops and payday loans for people needing small loans over relatively short periods. Credit unions charge no more than two per cent on the reducing balance of a loan and many charge just one per cent, which would mean that £1,000 taken out for a month and paid back weekly would accrue just £5.76 in interest at one per cent.”