“Pensioner runs up £30,000 debt” “I’m £80,000 in debt on 12 credit cards” These are just some of the shocking headlines that we see in the national press every day. However, is the problem actually this severe or is it all just PR spin?
Well, the figures speak for themselves. According to consumer research at Beacon Homeloans, 30 per cent of people admit to experiencing some credit difficulties. In addition, in Financial Services Authority research conducted in 2006, revealed that almost one in five consumers (17 per cent) believed that ‘finance was best left to the experts’. And these figures are just the tip of the iceberg.
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According to the Consumer Credit Counselling Service, over-indebtedness is rising fastest amongst older consumers. The findings showed that those most likely to be in debt were between the ages of 40 and 59. Not only did this group have the highest levels of debt – with an average of £34,456 – but was also growing at a faster rate than any other group. In comparison, younger age groups, namely those between 18 and 24 owed an average of £15,079 – half the amount owed by the over 60s, which stood at £33,568 in 2005.
In addition, Bank of England figures show that mortgage debt stood at a record £1.08 billion at the end of 2006, with consumer credit (cards, loans, overdrafts, and other non mortgage debt) totalling a further £213 billion. Indeed, the debt problem is so bad that it is estimated by some pundits that over one million county court judgements are issued every year.
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So, how have so many people got into debt? The answer is not as simple as it first appears. One of the main reasons is that they simply do not have enough money to live on, so they have to borrow to meet basic needs. Another major cause of debt is that circumstances change. Redundancies happen, people lose their jobs or their overtime, they suffer bereavements and relationships fall apart. Many people simply borrow too much and become involved in more debt to make ends meet. All of these factors affect the way people are able to cope with their finances – which in many cases then leads to debt problems.
But are there any solutions or are thousands of people fated to be stuck wallowing in a mire of debt? Well, one way in which people can ‘turn their financial problems around’ is to consult an intermediary. By consulting this type of financial expert, they are likely to find that a world of possibilities exists. Perhaps they can make new arrangements with their existing lenders, use overdrafts, loans, extend their mortgage or consolidate their existing debt into one loan.
Debt consolidation is likely to play a huge part in getting many people back on the path to ‘financial health’. As you may know, this is the replacement of multiple loans with a single loan, often with a lower monthly payment and maybe a longer repayment period. This allows the consumer to regain control of their finances, as they have only one monthly payment. This payment is generally lower than their previous rate, and means they have to deal with only one lender – helping to avoid falling behind on payments and therefore, getting a worse credit rating.
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However, advisers should also warn consumers that they could end up paying more overall, as the payments are set up over a longer period and there are often extra charges for setting up and repaying the new loan. If the loans that are being consolidated had interest added at the start, consumers will also be paying interest on that interest – as well as on the amount borrowed. Therefore, if they get into difficulties, it may be harder to come to a new arrangement with a single lender. Also, if the loan is secured against their home, their property will be at risk if they can’t keep up repayments.
If the debtor is an existing property owner, they have the added option of remortgaging to take advantage of the equity within their property to pay off some of their debts. While this might seem like an ideal solution to the problem of over indebtedness, it comes with the possibility of a consumer slipping into negative equity if the housing market does fall. In addition, the US mortgage market has shown that some consumers use this ‘get out of jail’ card numerous times and end up in debt well into retirement. Therefore, this move needs to be considered carefully by the consumer and guided by the intermediary.
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Consumers’ taking out unsuitable products or not getting access to the correct financial advice is a huge cause for concern surrounding the current debt problems. For this reason, Treating Customers Fairly (TCF) is something that must be foremost in lenders and brokers minds when discussing debt consolidation. Pre-sale, exact, complete information must be provided and must be used to provide a concise and clear description of the product allowance. Advisers must assess the financial situation of the borrower based on their ability to repay their debt, i.e. more focus must be on their income and credit commitments rather than just their payment history.
TCF post-sale must also be taken into consideration, by putting in place systems to limit automatic, unsolicited credit, for example, limit increases and credit card cheques. Where borrowers are in difficulty, advisers must seek a genuine solution where possible and take proportionate and reasonable measures to help, for example, reschedule payments where feasible and co-operate with money advisers.
So with good financial advice it is possible for people to stay on the property ladder. But what about people who have yet to purchase their first home or need to remortgage? Well, there is hope.
Although most mortgage lenders are wary of people with adverse credit, there is a swiftly growing ‘non-conforming’ mortgage market to cater for people with these needs. These lenders are more than equipped to deal with consumers who have everything from unpaid bills to County Court Judgements (CCJs) to bankruptcies.
There are – of course – some caveats that come with these products and the interest rates are typically higher than standard mortgage products. There may also be some restrictions as to when customers can refinance or repay the mortgage but generally these consumers feel it is a small price to pay in order to obtain financing. Many brokers are able to help consumers access these products although there are some tied advisers who tend to steer clear of providing guidance on adverse credit mortgages.
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In addition to this another boon for ‘credit impaired’ consumers is the move by some lenders towards affordability lending. By using an affordability-lending model, which assesses an applicant’s expected net income, living costs, and existing loans, lenders can determine an affordable mortgage repayment amount and thus loan for each consumer. This can help assist more customers in a more balanced and appropriate manner.
So there is hope and there are some good moves by the industry to help tackle the debt crisis and assist those looking for debt consolidation. But can more be done? Definitely.
We need more financial education for all UK consumers and there needs to be an increase on full information sharing between all financial institutions.
In addition, clear credit to income ratios could be set for maximum credit limits, as well as agreed triggers for industry funded independent debt counselling and such systems must operate across all lenders.
So with some hard work and the industry working as one, there is hope that in future the tabloid headlines might be more spin than fact! An odd ambition but definitely something to aspire to.
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