Monthly Archives April 2011

Secured Loans – UK Market Still Active

Secured loans in the UK ended up with a pretty bad reputation after all the financial fuss of ’07 kicked off.

There is no doubt the secured loan lending practices of the past were just as bad as some of the crazy mortgage offers around at the time with up to 125% of the value of your home being available to borrow.

Much like the banks, when the easy money stopped flowing and the industry started to collapse the secured loan companies couldn’t get funding and many of them turned to dust.

By 2009 14 lenders had left the market leaving only about 3 still operating.

Despite demand for debt consolidation going up, the money just wasn’t there to lend.

Like mortgage companies in the UK the secured loan providers had to get rid of risk by tightening criteria and restricting ‘loan-to-values’ of secured loans.

By late 2010 it was observed that demand for secured loans was up and consumer confidence had improved.

2011 is well underway and the options for borrowers are continuing to improve with cheap rates available that beat many unsecured loans.

Moneysupermarket have always had access to the some pretty good UK loan deals, including the most competitive secured loan offer in the market, for as long as I can remember and they still do with a 6.7% rate from Central Capital > See here <.

Loan-to-values are lower than they were but it is now possible to borrow up to 85% of the value of your home (including other secured debts) and by spreading payments over a longer term they can make other short term debts more manageable.

Of course if a debt lasts longer, more interest could be charged over time so a secured loan could cost more in the long run but could still be a more affordable way to get back in control of debt.

For example, credit card debt can last for a very long time if only the minimum amount is repaid.

This really good credit card calculator: shows that a £10,000 credit card debt on a rate of 17.9%  paying a minimum amount of 2% will take 64 years to pay back and cost nearly £27,000 in interest!!

A £10,000 secured loan at a rate of 6.7% could be repaid in 5 years for less than £200 per month and the total interest charged would be less then £2000.

Or, £10,000 at 6.7% over 25 years would cost less than £68 per month but the total interest over 25 years shoots up to just over £10,000.

Still far better than just paying the minimum on a credit card!

Not everyone will qualify for the lowest rate but other rates are available depending on individual circumstances.

In short, a secured loan is a much better option that a credit card when it comes to long term borrowing.

Credit cards are evil and should only be used for emergencies or the whole balance should be cleared each month.

If a secured loan is used to consolidate credit card debt the best course of action is to pay off the card, cut it up and close the account.

Another alternative to a secured loan is a ‘further advance’ from a mortgage lender which is essentially a ‘top up’ on an existing mortgage and with mortgage rates so low, it could work out even cheaper than a secured loan.

A Life Insurance ‘Trust’ Party – Bring cake…

Lucy: ‘Oh I’d love to be your trustee. It would be an honour. What time shall I come over?’

Sarah: ‘Well Catherine and Sally are getting here for about 2.30 and don’t forget to bring cake!’

2.30 arrives, pleasantries are dispensed and the ladies sit down to talk shop:

Sarah: ‘OK, so Simon and I are in the process of getting our life insurance up to date since we took out a bigger mortgage for the extension and our adviser has talked to us about putting the policy in ‘trust’

Catherine: ‘Is that like setting up a trust fund for the children?’

Sarah: ‘well sort of because the money goes where you want it to go. Let me go through my notes…

OK, it’s free to do this…’

Catherine, Sally & Lucy: ‘ Ooooh!’

Sarah: ‘Yes, I was suprised to hear that too’

Lucy: ‘What does it do?’

Sarah: ‘Well let’s see… All of your worldly possessions make up your ‘estate’ and that includes your debts too and your life insurance policies.

When you die this estate needs to be sorted out and any money or possessions you have gets used to clear any debts and then the rest goes to your ‘next of kin’…’

Catherine, Sally & Lucy: ‘ Aaaah!’

Sarah: ‘But…..wait…. That process of sorting out the estate can take months or even years so even though we have life insurance it could take weeks, months or even years before the money gets paid over to the right people.

Sally: ‘But if Simon died how would you pay for the house and the bills, let alone feeding the kids if you had to wait that long? I couldn’t do it if John died. We’d lose the house!’

Sarah: ‘That’s exactly why my adviser said there’s actually not a lot of point having a policy if you don’t put it in trust.

The trust means the life insurance policy is not considered part of our estate so it doesn’t get tied up in ‘probate’ and instead it would get paid straight away to the right people’

Lucy: ‘Why haven’t I heard about this? Where did you go for advice? We got our insurance online.’

Sarah: ‘Oh our mortgage adviser is very good and he says he always recommends insurance and trusts and any adviser that doesn’t isn’t giving their customer a good enough service.

I’d never buy my life insurance online now I’ve had proper advice.’

Catherine: ‘You’ve got me thinking now. You must give me your adviser’s details’

Sally & Lucy: ‘Yes, us too…’

Sarah: ‘I will but before I do and before we tuck into that cake let me just go through why I wanted you all here…’

Catherine, Sally & Lucy: ‘ Oh go on, but be quick!’

Sarah: ‘OK, Lucy & Sally, I need you to be my ‘trustees’. I’ve known you both since we started school and you were my bridesmaids at both weddings and there’s no-one I trust more to make sure the money from the policy gets paid to the right people.

Lucy: ‘Oh I see, we’re ‘trustees’ because you trust us..?’

Sarah: ‘Yes, that’s right. And Catherine, I need you to be my witness and sign the forms to make them legal’

Catherine: ‘Oh, OK, I can do that. No problem!’

Sally: ‘So you kind of explained on the phone but what will I have to do?’

Sarah: ‘Well I need to write a ‘letter of wishes’ which explains who I want the money to go to from my life insurance policy and how much I want each of them to get and you just need to make sure that gets done by overseeing things’

Lucy: ‘You told me that because we’re on the form, the insurance company will contact us if there is a claim and we just work with them to make sure they go by that ‘letter of wishes’ thing’

Sarah: ‘That’s it, I mean the trust form explains most of what happens to the money but the letter reinforces it’

Lucy: ‘And what do we have to do today?’

Sarah: ‘Today all you need to do is sign the form. I’ve already filled in the rest of your details, in fact, that’s all any of you need to do because I’ve filled in your names and addresses but Catherine I wasn’t sure of your date of birth?’

Catherine: ‘OK, I can fill that bit in and then all I have to do is sign it too?’

Sarah: ‘Yep, that’s it and it’s all done’

Sally: ‘That was easy’

Sarah: ‘I know, and now I know it’s taken care of, how about that cake…?’

Catherine, Sally & Lucy: ‘Yes please!’

Coping Classes – the bigger picture.

A recent report launched by Friends Life finds that the combination of the recession and spending cuts has brought about profound changes in the way in which generations within families support each other.

This information comes to the fore as 44 tax and benefits changes are introduced which could wipe billions off household incomes over the next year.

Rather than finding the traditional “sandwich generation” model, the ‘The Coping Classes’ report finds middle income households increasingly relying on their retired parents for financial support, while remaining more committed than wealthier or less well off households to helping their children financially.

Key findings:

  • 40% of middle income or ‘Coping Class’ households are turning to their retired parents for help in the face of unique and unprecedented financial pressures. 
  •  57% of middle income parents help or expect to help their children to buy a house, compared to just 33% of other parents (who ranked help with getting married highest).
  • The recession has left over half (59%) of the Coping Classes unable to provide for themselves and their families for longer than six months if they lost their main source of income.

Fuelled by the fear that over half of people unemployed in the UK have been so for over six months (52%), this group is now putting a series of coping mechanisms in place to stave off the threat of a potential financial survival gap, including:

  • Radically changing their attitude towards debt: 84% of the Coping Classes say they are committed to avoiding taking on more debt this year, and nearly three-quarters are putting plans in place to pay off most of their debt within ten years.
  • A renewed commitment to retirement funding: Almost half of the Coping Class identify saving for retirement or for a rainy day as the main reason for saving compared to the rest of the adult population who put saving for a holiday or travel top of the list. Nearly 60% of the Coping Classes believe it is more important than ever before to invest in a pension. 
  •  The Aleksandr Effect: the Coping Classes lead the way in shopping around for the best deal. Encouraged by the nation’s favourite meerkat, 70% of them use price comparison websites (compared to just 61% of other adults). According to the report, this has created an emerging social kudos attached to getting the best deal, with more than one in four of the Coping Classes claiming people go to them for financial advice as a result of their savvy approach. 
  • Looking after the pennies: overall there has been a 20% increase over the last two years in the number of households who say they are ‘carefully budgeting’ their household spending, with 95% of those that do budget maintaining that they adhere strictly to their budget plan

Comments on the findings from David Hynam, Director of Operations at Friends Life:“The recession has forced the Coping Classes to abandon their role as the ‘sandwich generation’, providing financial support to both their grown up kids and their retired parents. Many are now finding that it’s their parents – typically retired baby boomers who may have escaped the worst effects of the downturn and government cuts – who are helping them out.”

“Despite relying on their retired parents to act as a financial buffer, the Coping Classes are still committed to helping their own children but it’s now all about hand ups, not hand outs. What we’re seeing emerging – fuelled by the recession – is a new model of downward assistance, with each generation giving a leg-up to the one below. Practical parenting is taking on a whole new meaning, extending beyond those first few formative years to a whole-life role.”

“Five years ago the Coping Classes were comfortably off, but the recession and the effects of public spending cuts seemingly tilted against them has changed their status. We’re now seeing them take clear, decisive and urgent steps to address this.”

“Most striking is the new attitude towards debt. We’re witnessing a slow march down the debt mountain, which will have huge implications for financial planning and for the financial services industry.”

My thanks to the people who sent me this information.

Most of use live in our own little worlds and even friends don’t usually talk about money so it really makes a difference when we see the bigger picture and realise the situation a lot of people are in.

Risk Based Pricing & Responsible Lending – some thoughts…

In a nutshell risk based pricing is the reason why people with a poor credit score pay higher interest rates for credit.

It is standard practice to charge a higher rate of interest to a customer who is considered ‘higher risk’.

The price is based on the perceived risk involved in lending money to someone who might not have a very good track record with credit.

I’m struggling to come up with a really good argument for why this is a good idea…

People with either a history of badly managed credit or with no provable track record of managing credit could quite easily be considered higher risk than a person with exceptional credit management skills but why do they pay more for credit? How does that lower the amount of risk to the lender?

Risk based pricing combined with relaxed lending led to people with poor credit being given loans and mortgages at over the top rates. This led to missed payments, defaults, repossessions and a small hiccup in the global supply of credit.

I see that as a huge flaw with risk based pricing.

Now mortgage lenders in the UK are looking much more at affordability when it comes to borrowing in an attempt to control the amount of risk they are exposed to. Income multiples are only a guide these days and some lenders only let you borrow at a low rate if you can prove you can afford a mortgage at a higher rate. Other lenders insist on a certain amount of disposable income after essential expenses are paid.

This is a more responsible way to lend but these are the rules that apply to people with good credit!

At the moment, people with poor credit are still struggling to borrow money.

Money lenders are still trying to avoid risk.

In the past the theory was the reward should reflect the risk…

That makes sense if you’re talking about the adrenaline rush from jumping out of a plane.

However this school of thinking traditionally applies to investing which, also makes sense when taking a gamble on the future success of a business based on the business plan, market conditions and potential for growth.

When money that gets invested in financial institutions it ends up as credit and to reflect the risk of lending to poor credit customers and improve the reward the investor is offered a higher rate of return and the borrower is charged a higher rate of interest.

Who would invest in a business if the business plan was to lend money to high risk customers?

See link:  > Collateralized Debt Obligation <

Risk based pricing failed and it should not be used to entice hungry investors into high returns at the expense of others.

Basing lending on affordability and credit history is a more responsible approach.

People with poor credit should pay the same rate as everybody else (or if it’s increased the margin should have a maximum and reasonable threshold) but the amount they can borrow should be restricted.

A borrower with a poor credit history wishing to buy a house would need a bigger deposit as an incentive to save and manage money and to ensure they have a quantifiable interest in the property they are buying.

Credit card issuers can help people with poor credit by only extending small balances and really highlighting the fact that cards are only for short term borrowing and if credit is paid back quickly there is no interest to pay.

Some people will still max out their cards but if their credit limit is low the risk to the lender is low.

Borrowers need to be educated before they themselves take a risk and enter into a credit agreement.

After years of slack regulation and easy money the public’s perception of credit needed to change and that has happened to some extent but lenders should understand it was not the public that was at fault in the past and with a more sensible and responsible approach to lending the adverse credit market could be opened back up and actually help repair the damage caused and overcome the stigma attached to past practices.