The need for financial advice and financial planning has been emphasised again this week, as new figures reveal that the average UK citizen is now struggling with debts of over £6,000.

These debts do not include larger borrowings, such as mortgage owings. The main elements of the household debt include, on average:

- credit card bills of £1,748

 - loans of £3,077 taken to pay for cars, weddings, holidays, and home repairs

- bank overdrafts of on average £518

- finance deal borrowings of £646 to repay the cost of kitchens, furnishings and household goods

Of those surveyed, 47% said their household debts were due simply to the easy availability of credit, which led them to spend more than they earned.

A further 12% of people revealed that their debts had come about because they had lost their job, and a quarter of those surveyed said their credit card bills had arisen as they struggled to pay for everyday necessities, such as petrol and food.

Worst of all, 50% of those surveyed said that they were now able to repay only the minimum amount owed, and that they expected to be in debt for at least four years.

*Source: Lovemoney.com survey of 3,000 UK adults

Interest rates on personal loans are now higher than they have been for 9 years, and the average loan rate to borrow £5,000 over three years is now 12.9%, according to finance research site Moneyfacts.

These costly loan interest rates remain high despite the historically low Bank of England base rate, which currently stands at 0.5%. This reflects the perceived high risk of lending, with default rates on loans spiralling in the recently turbulent economic climate, and demand for debt management services at a high.

Furthermore, three-quarters of banks are now lending only to their existing clients, and then only on a secured loan basis. The unsecured loan seems to be a thing of the past, for the moment at least.

Applicants for business loans are faring little better.

 A new report from the Institute of Directors (IOD) reveals that 57% of companies who made loan applications were denied credit by their banks during 2009, and that 20% of business owners cancelled plans to apply for company borrowing, based on a conviction either that they would be refused, or offered credit at too expensive a rate.

As a result, a quarter of men and 64% of women are planning to work beyond the state pension age, with most of them listing financial necessity as the reason, according to the Equality and Human Rights Commission (EHRC)*.

This newly-emerging group of older but able-bodied people has already been dubbed ‘the welderly’ by politicians.

The percentage of pensions holders still seeking some degree of gainful employment, including part-time work, is likely to be much higher than the figures above. The Commission reports that 85% of those over the state pension age say that greater availability of part-time or flexible jobs would help them come back into the workforce.

Recent trends have shown a gradual erosion of commitment to pensions provision by both the state and the private sector, in particular through the gradual closure of many defined benefit (final salary) company pension schemes.

The report follows on from recent research by the central European statistics agency Eurostat in Brussels, which revealed that a third of pensioners in the UK are officially ‘living in poverty’.

Poverty is defined by Brussels as subsisting on less than 60% of the current national average wage of £316 per week. This implies that the ‘poverty line’ now lies at £190 per week, well above the average £130 provided to an individual with no other income by the Basic State Pension plus pensions credits.

*Report “Older Workers: Employment Preferences, Barriers & Solutions”, EHRC. Survey of 1,494 UK men and women aged 50-75

A change in the lending strategy by Lloyds TSB, the nation’s largest lender, may make personal loan deals from high street lenders more expensive for consumers in the future.

Lloyds is moving away from personal loans based on an advertised typical interest rate which, the law dictates, must be offered to 66% of successful applicants.

From now on, Lloyds will not advertise a typical rate, but will switch to offer loans based on personal pricing, with each customer being offered a deal based on their individual credit rating.

This is the second restriction on lending from Lloyds, which has already declared that borrowers must be existing current account customers of the bank.

By dealing only with existing customers, Lloyds can check its records on each customer who may seek a personal loan, and can assess how responsibly the customer has conducted his or her financial affairs in the past.

Customers who have defaulted on repayments of other loans, their mortgage, or have otherwise tainted their credit record are likely to face relatively high rates of interest, if a loan deal is offered to them at all.

If other lenders follow Lloyds’ example here, obtaining a personal loan looks likely to become more difficult in future. Every application for a personal loan leaves an imprint on your credit record, as a note is made each time a lender runs a credit check.

Lloyds customers must now make an actual personal loan application, before they find out what rate of interest they will be offered – making another such imprint on their credit file inevitable.

Loans are most readily available to existing current account customers and this ‘lender reluctance’ is the latest symptom of how banks continue to tighten up on loan availability in the current unfavourable climate.

Those loans that are available are more expensive, with the average on the 10 most competitive loans, based on a borrowing of £5,000, now at 10.78%, up from 9.24% at the start of the year.

While the British Bankers’ Association reported a fall in loan borrowing of 28% this year, moneysupermarket noted that online searches for loans were up by 20%.

“Whilst more people are looking for a loan, fewer are getting one,” said moneysupermarket in its report.

“It is quite clear that the fall in this kind of lending is almost entirely down to a lack of supply. We have also seen the average rates for personal loans increase across the board, so consumers who are lucky enough to be accepted for a loan have to pay more too,” said moneysupermarket’s head of loans, Tim Moss.

“The financial crisis may have eased, but this hasn’t filtered through to the personal loan market yet.  We have seen the banks go from choosy to almost locking down completely.”

In shopping for loans, consumers should note that the loan rate, or APR, quoted by a lender may not be the rate available to all applicants. It is therefore crucial that borrowers look closely at the terms and conditions of any loan offer they receive.

*Source: moneysupermarket.com

The high-cost credit specified includes pay-day loans (loans lasting just a few days), in-store finance options such as hire purchase, home credit, mobile phone text loans, credit union loans, pawn-broking, and rent-to-buy arrangements.

Certain behavioural patterns are associated with borrowers who burden themselves with these high-cost credit loans.

These tendencies include:

• Rushing the decision: tendency to decide in just a few days what borrowing option to use
• Failure to shop around for other forms of credit
• Failure to take advice or obtain information on product types
• Choosing a product which provides quickest access to money

The OFT also noted that consumers have expressed problems in understanding annual percentage rates (APRs) which dictate the longer term cost of borrowings. This hampered their ability to compare various loan products.

A significant increase in the number of providers of payday loans in the UK during 2009 was noted by the OFT as a symptom of the recession.

The international scene gives further clues about the growth of high-interest lending, showing that this less prudent savings mentality also seems to be widespread in Anglo-Saxon markets.

While payday lending has also flourished lately in the USA, Australia, and Canada, it has failed to take off in the very conservative German savings market.

*Source: ‘High Cost Consumer Credit’, emerging evidence from the OFT review, December 2009

Would you like to take a loan for £100, and are you happy to repay £110 a week later? 

If so, you can do so from the comfort of your sofa, your supermarket or your shopping centre, by sending a simple text message. 

Since a TxtLoan money transfer takes under five minutes, your £100 will hit your bank account before you get to the checkout.

The TxtLoan service targets “end of the month” shoppers who would like to keep spending until payday, or for those facing an unexpected bill.

Customers must register with TxtLoan to sign up for the loan facility. Once they are approved, they can activate their loan by text, using a personal PIN, at any time.

The company claims it offers an alternative to the much-publicised bank charges for unauthorised overdrafts, that can cost up to £35.

As a result, while TxtLoan advertises its loans on its website at an APR of 994%, the company maintains that given the short term nature of the lending, the term APR is not appropriate. It points out that the bank overdraft charges cited above for a small dip into the red could be equated to an APR of 3,500%.

The 15,000 customers TxtLoan has attracted since opening 9 months ago seem to agree. 

What’s the downside?

The downside is the fee levied on late repayments. 

Woe betide those who fail to repay a textloan on time. If you do not stump up your £110 on day 8, TxtLoan has the right to debit your account - and they come down on you like a snowfall from a Christmas tree. 

• Day 9: TxtLoan will send you a reminder plus an admin charge of £25, total £135. If that doesn’t work:
• Day 11: TxtLoan sends 2^nd reminder plus an admin charge of £25, total is now £160. If that doesn’t work:
• Day 16: TxtLoan sends 3^rd reminder plus admin charge of £20, total now £180
• Day 23: TxtLoan sends 4^th reminder plus admin charge of of £20, total now £200
• Day 46: TxtLoan refers you to their collections department and charges “additional administrative charges and transaction fees”

TxtLoan runs a credit check on all applicants as part of registration, and states quite clearly that customers must be in employment, and will be declined if they have been declared bankrupt or have been subject of debt collection within the last 18 months. “Other than that we will most likely approve your application,” TxtLoan states on its website. 

Txtloan was founded by 26-year-old Estonian businessman Gert Koppel. Based in London, TxtLoan is a lender licensed by the Office of Fair Trading.

Given the heavy charges that apply to late payments, TxtLoan’s service is suitable only for responsible borrowers who are able to repay on time.

Under the Consumer Credit Act, credit card loan agreements must contain three key pieces of information:

• The amount or limit of credit agreed
• The rate of interest to be charged
• Details covering how the debt is to be repaid 

In addition, the original document can be ruled as invalid even if these details were included, if they have now been obscured because the document is illegible. 

The test cases follow a case in October this year where a debt collection firm failed to enforce its claim on a debt of £6,585 due to an illegible original. The case, which related to a debt on an MBNA credit card, was thrown out, not because the original data had not been correctly logged, but because it was no longer visible on the old and faded document. 

Where documentation is illegible, it fails to fulfil its function as a record of the terms of the agreement, and the courts are unable to grant an enforcement order to recover the debt. 

Lenders must also provide documentation to prove that the terms of the agreement were communicated to the borrower at the time, although many lenders have difficulty in doing so due to their own disorganised filing and administrative systems.

The average level of debt for those affected is £4096.32, spread over bank overdrafts, credit cards, store cards and loans. 

The age grouping most likely to have hidden debt was the 19-30 age group, of whom 26% had hidden debt. 

Largest hidden debt by cash value was among the 46-50 age group, where the average amount was £5880, and the 36-40 age group, with an average debt of £5834. 

AXA recommends financial advice as a means of facing up to and gaining control of debt. 

“The important thing is for people to take control of their finances and get the help and support they need,” said AXA spokesperson Alison Green. 

Those hiding their financial concerns should be encouraged to take their head out of the sand and start taking an active role in their financial future, she said. 

*Source: AXA report ‘My Budget Day/UK home to £50bn of hidden debt’, November 2009

Secured loan or unsecured loan?

When a loan is secured this means that the borrower has offered the lender some form of security against the debt. This is usually a property, and secured loans are most commonly made to homeowners and secured on their home, hence the name homeowner loans. As the loan is secured, it is generally possible to borrow larger amounts, and secured loans of up to £100,000 are possible.

An unsecured loan, or personal loan, is not attached to any form of security, and is offered based only on the creditworthiness of the borrower. As a result, it is a more risky loan for the lender and unsecured loans tend to be less than £15,000 and offered only to those with a very good credit record.

What interest rate?

Most lenders have a policy of ‘risk-based pricing’ which means that different interest rates are offered to different customers, depending on their credit record. Lenders will have a ‘headline rate’ which is their lowest interest rate, available only to those with an excellent credit score. They also have a higher rate of interest known as their ‘typical rate’, which must be offered to 66% of all approved customers.

Fixed or variable interest?

It is crucial to understand that most secured loans have variable rates, which means that the lender can raise the cost of the loan at any time. This was a particular problem for many loan customers during the credit crunch, with some lenders actually doubling their interest rates.

Imperfect credit? Take action before you borrow

If you have an imperfect credit record, there are various ways to improve your chances of obtaining a loan.

You can ring the credit companies you are currently dealing with, for your credit cards or your mortgage, and request that they add a note to their records to explain why you were late or had problems with your payments.

Other actions which will enhance your chances of getting loan approval include ensuring your current payments for credit cards and bills are on time, establishing a fixed address, and adding your name to the electoral register to confirm your domicile and identity.

Payment Protection Insurance (PPI)

Payment Protection Insurance  or PPI is insurance which covers your loan repayments, if you are unable to work due to an accident. Historically, PPI was sold by lenders at the same time as the loan was taken out, but because of widespread mis-selling the Financial Services Authority ordered providers to desist from selling it in this way, from the end of May 2009. With PPI, it is particularly important to understand the exclusions contained in the small print of the agreement, and customers are well advised to have their financial adviser go through this with them, if they are considering taking out cover.