The biggest single reason people apply for a loan is to purchase a home. Mortgages, where the borrower provides the property as security against non payment, are a huge segment of lending. An estimated 60% of all domestic property has some form of mortgage loan outstanding. The total value of all property loans as disclosed by the Bank of England at the end of July 2010 was £1,239 billion pounds. This compares to lending to individuals for other purposes of just £217 billion. As customers are adapting to the harsher economic times, this amount is slowly being repaid and has fallen from £225 billion in January 2010.
Credit card debt accounts for £58 billion of this total. An amazing amount given that the rates of interest for borrowing on a credit card are extremely high compared with a personal loan. This short term borrowing is probably the most expensive form of debt individuals carry for any period of time.
Away from short term debt the principle reasons for borrowing fall into three broad areas:
Debt consolidation – This is where customers take out a new loan on better terms to pay off existing debt at high rates. For example, it may be that there is a combination of credit or store card debt at 18% interest bundled with a personal loan taken out a few years ago at 12% interest. Even in today’s tough markets it may be possible to obtain a new loan to cover this at 10% over a longer period. This can greatly ease the pressure on family finances. Many people have woken up to this option and lending for this purpose has grown considerably since debt management companies have highlighted the benefits of such an approach.
Acquiring a vehicle – This will probably be the second most expensive purchase after a home. Manufacturers and dealers are well aware that most customers cannot pay cash for a new or used vehicle. Hence, there is a huge market in personal loans and personal contract purchase plans to make obtaining a vehicle affordable for those on a budget. Be it a car, van, caravan or motorcycle there will be a point of sale option for financing the purchase. Many banks and other financial institutions also target this as a specific area of lending.
Home Improvements – Whilst the main home may be acquired on secured loan, home improvements such as double glazing, new kitchens or furniture are usually paid for by borrowing on unsecured loans. These tend to be relatively short term reflecting the smaller amounts involved when compared to property loans.
Lenders focus on the ability to repay and so there are regional variations in the amount of credit granted to individuals. The wealthier regions have more appeal than the poorer regions in the North and West of the country. Less well off areas are the domain of the subprime lenders and doorstep lenders who use different products and techniques to approach the market. Weekly payments and short term loans from places like at high rates will be more common in these areas as people’s credit ratings are generally lower and less appealing to mainstream lenders.
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