Today's Times: Debt charities cast a wary eye on waters as loan sharks circle
Christine Seib , The Times 25th March 2008
Doorstep lenders and loan sharks are moving into the space left by Britain's high street banks, whose tightening credit terms are leaving millions of people without access to mainstream finance.
Debt campaigners have seen hordes of clients forced to borrow at extortionate interest rates because they have had their credit cards cut off or have been refused loans as the country's biggest banks react to the global liquidity crisis.
Banks have scrapped 125 per cent mortgages, increased the minimum deposit needed for first-time mortgages and reduced credit card limits as the banks' own borrowing costs rocketed in response to a worldwide collapse in interbank lending.
Last month Egg, the online lender, cancelled the credit cards of more than 160,000 customers. Many lenders, including Nationwide, Britain's biggest building society, are charging higher rates for borrowers who do not have a 25 per cent deposit.
At the same time, Provident Financial, the country's most prominent doorstep lender, has predicted a booming 2008. The lender said this month that the number of people who fell into the “non-standard” category of borrowers had grown to about ten million.
The Financial Services Authority estimates that up to seven million people had difficulty gaining mainstream credit, and Citizens Advice reported last week that mortgage arrears problems had shot up by 35 per cent in the first two months of 2008, compared with the same period last year. Citizens Advice bureaux said that they had dealt with 215,000 new debt problems in January and February.
Doorstep lending, which usually involves small loans on interest rates of 100 per cent or more, with payments collected each week by a local agent, is legitimate, but debt charities fear that unauthorised lenders are also capitalising on the increased number of people who have found their usual lines of credit diminished or cut off.
Faisel Rahman, managing director of Fair Finance, a non-profit sub-prime lender based in East London, said: “It's a race. We can forge a new way of lending but we can assume that our competition will also move in.”
Neil Cooper, of Debt on our Doorstep, which campaigns to end high charges for sub-prime lending, said: “I'm sure unauthorised lenders will see an opportunity there, but the biggest risk is the sub-prime lenders who already have their infrastructure set up. People will be forced to go to them for very expensive loans because they can't get credit elsewhere.”
Keith Tondeur, president of Credit Action, a charity that offers budgeting education, said that many of the people who were turning to sub-prime lenders had previously been good customers of the high street banks. “People who've been able to borrow at will are now unable to do so,” he said. “This comes at the same time as rising food and fuel prices and declining asset values — it's not a pretty picture.
“There's a great core of people who've been borrowing happily for 20 years and all of a sudden that's no longer available to them.”
Case study
Luis García, 38, who asked The Times not to use his real name for fear of reprisals, repaid more than £15,000 over five years after borrowing £3,000 from a loan shark in Britain.
Unable to get a standard bank loan, the Colombian borrowed the cash in 1999 to set up a new life in the UK, but, with repayments of £450 a month, was unable to pay off the principal.
“I was paying 15 per cent on my loan, but if I couldn't pay the full £450 and gave him only £300 one month, the other £150 went on to my loan and I paid 15 per cent on that as well.”
When his lender, also from Colombia, threatened the life of Mr García's family in his home country unless he kept up the huge repayments, Mr García turned to Fair Finance.
He said that he cried with joy when the non-profit sub-prime lender offered him sufficient credit to pay off the loan shark.
Debt campaigners have seen hordes of clients forced to borrow at extortionate interest rates because they have had their credit cards cut off or have been refused loans as the country's biggest banks react to the global liquidity crisis.
Banks have scrapped 125 per cent mortgages, increased the minimum deposit needed for first-time mortgages and reduced credit card limits as the banks' own borrowing costs rocketed in response to a worldwide collapse in interbank lending.
Last month Egg, the online lender, cancelled the credit cards of more than 160,000 customers. Many lenders, including Nationwide, Britain's biggest building society, are charging higher rates for borrowers who do not have a 25 per cent deposit.
At the same time, Provident Financial, the country's most prominent doorstep lender, has predicted a booming 2008. The lender said this month that the number of people who fell into the “non-standard” category of borrowers had grown to about ten million.
The Financial Services Authority estimates that up to seven million people had difficulty gaining mainstream credit, and Citizens Advice reported last week that mortgage arrears problems had shot up by 35 per cent in the first two months of 2008, compared with the same period last year. Citizens Advice bureaux said that they had dealt with 215,000 new debt problems in January and February.
Doorstep lending, which usually involves small loans on interest rates of 100 per cent or more, with payments collected each week by a local agent, is legitimate, but debt charities fear that unauthorised lenders are also capitalising on the increased number of people who have found their usual lines of credit diminished or cut off.
Faisel Rahman, managing director of Fair Finance, a non-profit sub-prime lender based in East London, said: “It's a race. We can forge a new way of lending but we can assume that our competition will also move in.”
Neil Cooper, of Debt on our Doorstep, which campaigns to end high charges for sub-prime lending, said: “I'm sure unauthorised lenders will see an opportunity there, but the biggest risk is the sub-prime lenders who already have their infrastructure set up. People will be forced to go to them for very expensive loans because they can't get credit elsewhere.”
Keith Tondeur, president of Credit Action, a charity that offers budgeting education, said that many of the people who were turning to sub-prime lenders had previously been good customers of the high street banks. “People who've been able to borrow at will are now unable to do so,” he said. “This comes at the same time as rising food and fuel prices and declining asset values — it's not a pretty picture.
“There's a great core of people who've been borrowing happily for 20 years and all of a sudden that's no longer available to them.”
Case study
Luis García, 38, who asked The Times not to use his real name for fear of reprisals, repaid more than £15,000 over five years after borrowing £3,000 from a loan shark in Britain.
Unable to get a standard bank loan, the Colombian borrowed the cash in 1999 to set up a new life in the UK, but, with repayments of £450 a month, was unable to pay off the principal.
“I was paying 15 per cent on my loan, but if I couldn't pay the full £450 and gave him only £300 one month, the other £150 went on to my loan and I paid 15 per cent on that as well.”
When his lender, also from Colombia, threatened the life of Mr García's family in his home country unless he kept up the huge repayments, Mr García turned to Fair Finance.
He said that he cried with joy when the non-profit sub-prime lender offered him sufficient credit to pay off the loan shark.
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