07/01/08

Loans more difficult to obtain following credit crunch

Following the credit crunch in 2008 many loan lenders raised their interest rates and tightened up on their lending criteria as a result of global credit problems. The situation, which has been termed a 'credit crunch' or 'credit squeeze' has made it more difficult to obtain a loan as banks other financial institutions have become more wary of lending funds because they are not sure how risky it might be, thereby driving up the price of borrowing.

The panic, which has been blamed on a dramatic rise in mortgage defaults in the US, is expected to continue for some time.

Justin Urquhart Stewart, of Seven Investment Management, said: 'Banks have had to tighten up because they simply have less to lend – they have suffered losses in the market turmoil. Borrowers with less than a perfect track record will either not get a look in or they will have to pay a premium to borrow money.'

Neil Munroe of Equifax, a credit reference agency, said: 'Lenders are looking far deeper into people's credit histories. They will be looking for early warning signs of how borrowers deal with credit. Lenders are more interested in how borrowers service their debt than simply whether they have kept up with payments in the past.'

Jill Stevens from Experian, another credit agency adds: 'Even without the situation in the US lenders in the UK have been under pressure to lend more responsibly because of the increasing level of personal debt. Those with an unblemished credit history should be okay but those who are borderline could have problems - previously they might have been given the benefit of the doubt but going forward it is far less likely that they will get such concessions.'

Banks providing unsecured loans have been getting stricter for some time as a result of the rising level of debt in the UK, which is now more than £1 trillion and rising. There are an estimated 12 million adults with £66 billion worth of personal loans outstanding in the UK — more than twice the amount of debt taken out on credit cards, and six times the amount people have on overdrafts. Two out of every three people take out a loan to consolidate their debt, according to MoneySupermarket.com.

A survey by MoneyExpert.com revealed that 1.91 million people had applications for loans turned down in the three months to September 2007, a sharp rise on the previous quarterly figure of 1.39 million.

Sean Gardner of MoneyExpert.com said: "It is becoming much more difficult to borrow money as lenders get tough on granting applications. They've been stung by bad debts, with borrowers unable to repay the cash, and are tightening their lending criteria.

"A combination of the credit crunch and the Bank of England putting up interest rates has hit borrowers' ability to repay, and lenders are reacting. It is not just a matter of rates on loans going up. Lenders are being much more cautious about who they will lend to."

Additional findings from Moneysupermarket also point to a tightening in the loan market with the number of people who are seeing their loan applications rejected increasing considerably over the course of 2007.

In April 2007, 67% of people applying for loans were seeing them approved, that figure dropped by a considerable 15% to just 52% in October.

Commenting on the research, Tim Moss, head of loans at Moneysupermarket said: "The banks are denying they are getting choosy, but our findings show they are and many deserving Britons are suffering because of it."

"In the past, the underwriters looked at the value of a debt and thought, 'This one is small enough that we can ignore it'. Now they are looking for reasons to refuse people, so that they are left with safer and safer customers."

Experts are warning consumers to take extra care to keep their credit rating up to scratch in a new atmosphere in which even an unpaid £5 mobile phone bill can become grounds for turning down a loan application.