Loans can be a trap
KENT ON SUNDAY - 26TH OCTOBER 2003
Why are British Gas and Norwich Union ladling out money to Britons? One of the oddities of our debt mountain is the grimmer the figures, the keener lenders are to get involved.
A new report for the Credit Services Association says personal consumer debt is approaching £170b – up £30b in two years and growing by £1.7b a month.
With rates at 40 year lows, who cares about interest charges? Few will have seen the first speech from the new Governor of the Bank of England warning rising rates are almost a cert as the world economy recovers.
It is therefore, no surprise that financial website moneysupermarket.com confirms lenders are “leapfrogging” each other with best rates. The site claims to offer seven of the 10 cheapest personal loan rate exclusively.
Its top five – ie cheapest- lenders are Lombard at 6% APR of £5,000-25,000; Britannia, at 6.2% (£5,00-19,999); British Gas 6.3% (£5,000-25,000); Norwich Union 6.4% (£7,000–14,999) and Sainsbury’s Bank 6.4% (£5,000-25,000)
Debts
Others are less sanguine about the credit boom. Simon Robinson, chief economist at City brokers and fund managers Gerrad, says figures suggest the average household owes 123% of income.
Sainsbury’s Bank reckons up to seven million people have personal debts, excluding mortgages, or between £10,0-00 and £40,000 some of it at rates of 30%.
Over £21billion of loans taken out in 2003, it says, will go on debt consolidation. Around £17.7b will be borrowed to buy cars, while home improvements, in third position, guzzles £8.9b.
The danger is huge amounts of credit are in the hands of those least able to handle it if economic trends go against them.
Says Simon Burgess at insurance brokers Burgesses: “There is little doubt people are being encouraged to spend money they don’t have on things they can’t afford. Many finance companies are targeting former council tenants who exercised right to buy and have thousands of pounds of equity in their own homes.
“Credit cards firms are bombarding people to borrow money inappropriately. Things are spiralling out of control, and it could be catastrophic if rates rise significantly.”
Borrowers should also shop around on payment protection insurance sold as a condition of many loans.
High Street banks take the premium upfront and add it to the loan – at rates which can be so steep cover can cost a quarter of the total loan over the repayment period.
Says Simon Burgess: Too much payment protection insurance is sold indiscriminately – for example, self-employed people buy redundancy cover which they could never actually claim.
Standard payment protection insurance cover discharges the loan in the event of death or critical illness – or makes monthly repayments in the event of accident, sickness and unemployment.
Many payment protection insurance policies are not worth the paper they are written on, but it is vital to use a broker to find a premium which may be a third of the figure loan firms and banks try to charge.”
