Debt and the Changing Face of the Credit Market

Food prices up, repossessions up, house prices down… these are troublesome times, especially for people whose monthly debt repayments are taking up valuable funds they need to cope with the ever-increasing cost of living.

After years of easy access to credit, many households have grown used to the idea that they can consolidate their debts, effectively spreading their repayments out over a number of years to reduce their monthly repayments. It may end up costing more, but it’s a tried-and-tested way of making debt repayments more manageable, keeping debts from snowballing into a serious debt problem.

Today, however, the credit market has changed, as the Bank of England’s latest Credit Conditions Survey proves. Covering (among other things) secured and unsecured lending to households, the Survey shows what lenders in the UK have noticed in the last three months, and what they expect to see in the next three.

In 2008’s Q2 Survey, lenders revealed that they’d reduced the availability of both secured credit (from secured loans to mortgages) and unsecured credit (from credit cards to unsecured loans). What’s more, they expected to see further declines in the availability of both secured and unsecured credit in the next three months.

For secured loans and other secured credit, Q2 seems to have seen the worst actual reduction in availability (around 45%). Availability is expected to go down in Q3 as well, but by only about half as much.

The availability of unsecured loans and other forms of unsecured credit came down by around 25% in Q2, and it’s expected to drop slightly more than that in Q3.

For secured loans and unsecured loans alike, lenders are basically tightening their credit scoring criteria, which means they may well refuse loans which they would have granted a year or so ago.

When it comes to secured loans, they’re also ‘decreasing maximum loan to value (LTV) ratios’, which means they’re being more cautious about securing loans against the value of a property. According to the Nationwide House Price Index, the typical house is worth £15,000 less than it was a year ago, so it’s difficult to be sure how much equity a homeowner will actually own 12 months from now.

There’s no question that this is worrying news for people who were thinking of consolidating their debts. Now that lenders have become so much more cautious about lending money, there’s no guarantee that they’ll be able to get a consolidation loan (either secured or unsecured).

However, it’s important to realise that loans – both secured and unsecured – are by no means unavailable. It’s true that some people may find it difficult to find the debt consolidation loan they need, but it’s often a case of finding a loan provider who specialises in helping people in their financial situation.

Plus, a consolidation loan isn’t always the best debt solution anyway. Many people in debt would be better off with a debt management plan, an IVA (Individual Voluntary Arrangement) or a protected Trust Deed (for residents of Scotland only).

Each debt solution comes with its own distinct benefits and drawbacks, and identifying the most appropriate solution requires an in-depth understanding of the credit market, as well as the of debt solutions themselves. It’s never advisable to choose a debt solution without first talking to an impartial debt adviser who can explain the details of each and recommend the most appropriate one(s).

To read more about different debt solutions such as debt consolidation & IVAs, visit http://www.debtadvisersdirect.co.uk

Debt Terms & What They Mean...

I found this the other day & thought it was worth sharing with all of you. It was written by http://www.gregorypennington.com, a UK based debt management company.

Whether in debt or not, you’ll probably be hearing quite a lot about the world of personal finance at the moment. It’s an industry traditionally surrounded by complicated terminology, and it’s not always the easiest to understand. Here, you’ll find ten debt-related terms you should have in your vocabulary (or at least understand):

Arrears
Arrears are any overdue payments on a debt. If you have mortgage arrears, for example, it means you have not made one or more of your mortgage payments as set out in your mortgage agreement.

Bailiff
A bailiff is a person (either a court official or employed by a private firm) authorised to enter a property and seize goods that can be sold to repay a debt.

Bankruptcy
Bankruptcy is a legal process for individuals and businesses that can’t pay their debts. Their assets are handed to the official receiver who sells them and distributes the proceeds amongst creditors. The bankrupt usually has to pay an additional monthly sum for a period of 12-36 months until they are discharged. Once the process is over, all outstanding debts are written off.

Charging Order
A charging order secures the value of a debt against a property, ensuring that the debt is repaid upon the sale of the property at the latest. Creditors can apply for a charging order on failure to make a CCJ payment.

County Court Judgment (CCJ)
If you don’t repay a debt, your creditors can ask the County Court to issue a County Court Judgment. If the County Court grants the CCJ, they will order you to repay the debt in a way you can afford.

Debt Consolidation
Debt consolidation is the process of taking out a single, larger loan to pay off some / all your existing debts. Simplifying your finances, this can reduce the interest you’re paying as well. Debt consolidation can also reduce your monthly payments by spreading the loans over a longer term – although this could well increase the total amount you end up repaying, as well as the time you spend repaying it.

Debt Management
Debt management can help you repay your debts in an affordable way without taking out any further credit. It involves negotiating the terms of your debt (such as interest & repayments) with your creditors. Some people do this themselves; others ask debt management professionals to do it for them.

Individual Voluntary Arrangement (IVA)
An Individual Voluntary Arrangement is a government-backed debt solution available to people who:
a) owe more than £15,000 to two or more creditors,
b) cannot afford their monthly payments,
c) can afford to make regular fixed payments for the next (usually) 5 years.

In essence, it’s a legally binding agreement between the individual and their creditors:
a) The individual agrees to make fixed monthly payments – as much as they can afford once they’ve taken essential living expenses into account.
b) In return, the creditors agree to write off any outstanding debt when the IVA is successfully concluded.

An IVA can’t go ahead unless creditors accounting for at least 75% of the individual’s debt agree to it.

Insolvency Practitioner (IP)
An Insolvency Practitioner is a person professionally qualified to handle insolvency cases, such as bankruptcy, IVAs & Trust Deeds.

Insolvent
A person or business is regarded as insolvent when their assets (what they own) are worth less than their liabilities (what they owe).