Instant decision from high street banks
If you go to any well known price comparison site or even direct to the high street banks, you may well see low rates loans advertised.
However, I suggest you check the small print, because many of the banks will only consider applications from customers who already hold a bank account with them.
Well at least you get an instant decision if you don’t bank with them!
Even if you do bank with them, many of the high street banks still cannot give you an instant online decision. In today’s world of convenience, people want instant decisions and not to have to open a bank account to get one.
That’s where The Lending Wizard is different, very different. It offers loans to any customer regardless of who they bank with. What’s more, it offers an instant decision across all of its lenders.
Where have all the secured lenders gone?
Just 18 months ago there were four times as many secured loan lenders in the market as there are today. Capital One, First Plus, Picture Finance and Alliance & Leicester are just some of the names who have withdrawn from the secured loan market. Even before the full impact of the credit crunch, some of the biggest secured lenders, who were regularly advertising on daytime TV, were shutting their doors to new customers.
For some lenders, their profit models were built on high volume sales of single premium protection insurance (SPPI) which had expensive premiums (sometimes up to 30% of the loan) on top of which the customer would then be charged interest. Once the FSA started to outlaw the sale of SPPI and carried out enforcement to companies who were miss-selling the product, many of these secured loan companies withdrew from the market. These lenders didn’t make any money out of loans. They made money from selling insurance!
The credit crunch has seen a dramatic fall in house prices. Secured loans are secured on the equity in property (the difference between a house’s valuation and the outstanding mortgage). As house prices fell, so did the amount of equity, so much so that secured lenders became increasingly nervous about lending at all. A number of lenders left the market which were no longer willing to take the risk (of negative equity) or simply ran out of funding. Even those that remain today will only lend if there is ample equity, so making it difficult for many homeowners to get a secured loan.
The good news is that when we do see those early green shoots of recovery and house prices stop falling and even start to rise, then lenders’ confidence will begin to return. Knowing that property will slowly but surely start to increase in value, we can expert to see lenders’ appetite to lend increase and maybe even some lenders returning to the secured loan market.
The reason why loan rates are so high
The Bank of England base rate is at its lowest ever level so why are loan rates so high?
The Credit Crunch owes its origins to the US but more particularly to mortgage bad debt. Bad debt put simply, is money which is owed to banks which it is unlikely to recover. Over the last year you will have no doubt heard on the news that so-and-so bank has written-off another ‘x’ £billions of bad debt. Bad debt written-off is when the bank accepts that it will never get that money back.
Sadly the recession is affecting our lives in many ways such as a drop in consumer spending, house prices falling and unemployment rising. Any rise in unemployment means that for all types of loans, not just mortgages, more and more people will find themselves struggling to repay them. This creates bad debt for the banks.
Even in the good times, all banks expect that a small percentage of loans will become bad debt. However, knowing that the levels of bad debt will rise (on the back of rising unemployment) the banks have put up their APRs across all loans (both unsecured & secured) in order to build up contingency funds to cover those anticipated bad-debt losses.
So even though the Bank of England’s base rate is only 0.5%, APRs for even the lowest rate unsecured loans now start from around 8%. As and when we start to come out of recession, consumer confidence will start to return and spending will increase. Then unemployment will start to fall and with it, banks expectations of bad debt levels will reduce. This is the point at which we should start to see loan APRs dropping although the eventual sting in the tail will be that the Base Rate will start to rise!
The end of SPPI is good news
Consumer groups, such as the Citizens Advice Bureau, have been campaigning for some time against SPPI (Single Premium Protection Insurance) for a number of reasons. A full ban is scheduled from 2010. Finally, some good news!
Unlike monthly insurance policies, with SPPI you pay for the policy in full upfront. This is then added to the loan which means that you also pay interest on the insurance premium. Most of these policies also had very poor or even non-existing refund policies so that if after 2 years you wanted to pay the loan off, you would have to pay off the full insurance premium. When you combine the expensive premiums with the multitude of exemptions they put in the small print (so the insurer wouldn’t have to pay out) and you can see why it really wasn’t a good product for the consumer.
SPPI was so profitable for the banks that the money they made actually helped to keep the APRs (loan rates) artificially low. Indeed when you consider that 18 months ago, when most banks were selling SPPI and the Bank of England base rate was 5.75%, you could get a personal loan at 6.8%. Today, banks only sell the far more consumer friendly monthly insurance policies, base rate is down to only 0.5%, and yet the lowest APR rates for personal loans are now around 8%. Of course there are other factors, such as the credit crunch, which have also impacted APRs.
Overall though, even at today’s higher APRs, if you take out a monthly insurance policy to cover your loan, compared to the same loan with SPPI cover 18 months ago, the combined cost of the loan and the insurance is cheaper today and can provide more comprehensive cover.