The secured and unsecured loans sectors have both grown significantly over the past decade.
Once viewed as markets embroiled with shady dealings and unfair costs and fees, the secured loans market in particular has recorded meteoric growth over the past 10 years.
Brought on by rising consumer debt, consumer choice and product diversity, the loans market is now a huge sector.
Central to the growth of the secured loans market has been the rise of the ‘spend now, save later’ attitude of consumers. While this philosophy has begun to plateau, the 1990s saw a significant rise in consumer debt.
Brian Coulton, senior director, sovereigns at Fitch Ratings, admitted that rising consumer debt was a concern. “The amount of debt people are shouldering is very much a 21st century phenomenon. Up until this century, the distribution of debt meant that while debts increased with an interest rate rise, people savings went up to compensate. However, rate rises are now having a direct negative impact on cash flow.”
Secured, and to an extent, unsecured loans have helped to limit the debt levels, and provide valuable opportunities for intermediaries eager to enter other market sectors. With increased competition in the marketplace; a rise in the number of products and lenders offering both prime, non-conforming and niche ranges, brokers need to look at other ways and to different markets as a means to generate income. The loans market is one sector worth considering.
Spectacular growth
As Andrew Forsey, director at Andrew Forsey Financial Services, admits, the growth of the secured and unsecured markets have been spectacular, most notably over the past year. He says: “Secured loans have definitely grown as they have become more competitive in the market, especially in the last six to12 months. The exit charges have reduced considerably, which has made them a much more attractive proposition. If a client wants to raise funds and cannot get a further advance and has early repayment charges on their existing mortgage, unsecured loans are a valid option. More advisers are selling unsecured loans as they become a more established product.”
While the market has reported considerable growth, many intermediaries have begun to realise the diversity and flexibility that secured loans can provide. While 10 years ago, the loans sector was discounted as a valid market, the industry has woken up to the need for such a product area.
Although remaining a niche market, this sector shows no signs of abating and continues to grow at a steady and continuous rate.
However to advise in this area, intermediaries must have an active involvement in the growing market. Much like the equity release sector, it has been advised that unless you are dealing with the market on a regular basis it is best to recommend that the consumer goes to a loans specialist. The Financial Services Authority (FSA) has stated that for equity release, brokers should not ‘dabble’ in the market, and the same is true with the secured loans sector.
Active participation
James Cotton, mortgage specialist at London & Country, agrees brokers need to be active in this market if they are to advise consumers on the best deals. He says: “Secured loans are not something we do ourselves, but they do have a place in the market. The main thing about them is that, unlike other debt, they are secured against your home. If we get someone asking for one, we refer them to someone who specialises in that area.”
Cath Hearnden, director at My Mortgage Direct, agrees that they have a place in the market, but has reservations about the strength of the sector. She says: “I think the secured loans sector has grown but it is a very expensive way of borrowing money. Often there are a lot of alternative ways of getting money before having to go down that route, such as looking at rates for unsecured loans or seeing what you might be able to do with your mortgage. There is a place for unsecured loans in the market, but it is a small one.”
The use of secured loans
Secured loans are now being seen as a valid and valuable alternative to remortgaging. Fees on secured loans, over the lifetime, are often cheaper than remortgaging and there is no redemption fee penalty associated with secured loans.
Despite higher interest rates associated with secured loans, the average now at the 10.9 per cent mark, this has dropped by 3 per cent in five years, with further expectations that this will drop, fuelled by the popularity of funding lines.
Those involved in the market have also pointed out that secured loans exist for a far shorter period than for a mortgage, meaning that the overall cost comparison falls in favour of the loan as opposed to mortgage payments.
A growing number of borrowers are also reverting to secured loans as a means to improve their property. Phil Jones, joint managing director of Nemo Personal Finance, admits that borrowers and intermediaries realise the benefits and diversity that the loans market can cater for. He says: “Home improvements can provide homeowners with an alternative to moving house if they need to accommodate a growing family, or if they simply want more space. Since paying out our first loan in February 2005, almost a quarter of customers have borrowed specifically to fund home improvements, with the overall majority of customers having an element of home improvements attached to their need to take a loan out with us.”
Regulation has also helped improve the reputation of the loans sector. The introduction of statutory Financial Services Authority (FSA) regulation into the market has increased intermediary confidence in the marketplace, with checks in place to help both brokers and consumers. This has undoubtedly aided the mortgage market as a whole, and opened up new avenues of business for intermediaries to consider getting involved in.
Following a period of six to 12 months of market consolidation, both from brokers and lenders following the advent of FSA regulation, people can no longer afford to stay still in this busy market. The buy-to-let, self-certification and bridging finance sectors all provide new opportunities for mortgage intermediaries looking to expand their offerings and scope, and the secured loans market is another market that could be grouped with these.
Earning potential.
It is clear that the secured and unsecured loans sectors have grown considerably over the past ten years. While this has been facilitated by consumer choice, intermediaries keen to enhance their earning potential are increasingly looking at this market as a way of generating income.
While concerns still rage as to the future growth of the market, it is clear that the sector has already undergone a massive period of transition, appealing to a greater number of consumers and intermediaries. This growth has helped a large number of consumers obtain finance that would have otherwise been out of their reach, and brokers have been able to act in this market, earning considerable commission and procuration fees on deals.
