Personal secured loan mortgage uk

The law cannot keep up with illegal lenders but the market may yet drive them out of business.

Not all moneylenders are loan sharks. At the far end of the spectrum of legitimate financial institutions, increasing numbers of companies are offering an expanding range of very expensive credit services. True loan sharks are a different, and much more dangerous breed.

Loan sharks beat up people who don't keep up with repayments. They terrify borrowers into silence and compliance. They often use the proceeds of crimes such as drug dealing and selling counterfeit products to finance their activities. And they lack the licences, issued by the Office of Fair Trading, that the law requires all moneylenders to have.

Hidden in the criminal underworld, loan sharks also get away with charging annual percentage rates (APRs) in the thousands and even millions, according to trading standards officers. The secrecy of the loan-shark business makes it impossible to gauge its extent, but it is a nationwide phenomenon and is particularly rife where people's incomes are very low and unemployment is high.

Focus-group research by Bristol University's Personal Finance Research Centre (PFRC), among people receiving benefits or a government budgeting loan, found a consensus that "most" had used a loan shark at some point.

However, this applies only to deprived communities. In the words of one trading standards officer, who wishes to remain anonymous: "Loan sharks' clients are people who are very, very vulnerable, who are then easy prey for them. People who are surviving on benefits, single-parent families and the elderly."

For obvious reasons, these lenders don't advertise. Local people desperate enough to use their services know where to find them, or know someone who does. Illegal lenders also avoid giving their victims any written evidence of their operations. Robin Croft, the Liverpool trading standards manager, says: "There is very little paperwork involved. Interest rates and the length of the repayment period are often not discussed."

People typically borrow less than [pound]100, for costs such as Christmas presents and unusually large fuel bills. Croft says: "Records of repayments are not given to the borrowers and when top-up loans are involved, the borrower often has no accurate record of what has been paid and what is still owed."

Why do people turn to sharks? Because they need money quickly and feel they have absolutely no alternative. The PFRC found that illegal lenders are the least favoured of 11 possible sources of credit, including pawnbrokers, government loans and friends and family. But for those who are desperate, they may be the only one. This helps explain why investigators find it so hard to get evidence against loan sharks. Borrowers do not want to lose their only source of credit. But the threat of violent retribution also keeps people quiet. Glasgow City Council now has a telephone hotline on which people can leave information without revealing their names.

It is common for loan sharks to take benefit books as security against the risk of non-payment. They hand back the books, temporarily, so people can claim their money. But then, according to the PFRC's findings, they take as much as three-quarters of the cash in repayments.

The Office of Fair Trading is aware of only eight successful prosecutions against unlicensed traders in 1999 (not necessarily all loan sharks: other businesses, including debt collectors, are also supposed to have consumer credit licences), and 11 in 1998. As trading standards officers are not obliged to notify the OFT about loan-shark prosecutions, these figures probably under-represent the total numbers of cases. But they are depressingly low.

The anonymous trading standards officer is not confident of winning the war. "The illegal lenders have become more aware of being investigated. They're tightening up their practices as a result, for example using mobile phones to warn each other when law enforcers are watching them handle benefit books at social security offices. It takes it further underground."

A more effective strategy may be to deprive the illegal lenders of their market. That means promoting safer sources of credit. Ian Wilson, the head of consumer and trading standards at Glasgow City Council, explains: "We're trying to promote credit unions within housing estates and workplaces. It has been fairly successful -- quite a few community credit unions have been started."

Legal lenders' growing interest in people with low incomes and poor credit histories may also help borrowers avoid the jaws of sharks. John Fox, consumer credit spokesman for the Trading Standards Institute, says: "The availability of non-status or sub-prime credit has increased over the past five years. This is not to say that consumers on the fringe of the market get the same terms as you or me. They don't, and credit or goods on credit are significantly more expensive."

UK lenders describe poor people, those with bad credit histories and those who are self-employed as "sub-prime", "non-status", "non-conforming" or "credit-impaired". Metris, a lender to the same groups of people in the US, uses the politically correct "underserved" to describe its market. Whatever the label, these people comprise around a quarter of the UK population aged 18 to 65, according to the market analysis company Datamonitor.

To be a candidate for the sub-prime market, Datamonitor says, you will be unemployed, on state benefits, in arrears with a mortgage, in receipt of one or more county court judgments, lacking a bank or building society account or absent from the electoral roll. But not all are equally sub-prime: "The successful sub-prime lenders will 'cherry-pick' the lowest-risk customers and benefit from the highest returns because of this," according to Datamonitor.

We may see the lenders' ugly terminology change as more of them move into this market. Barclaycard, which rejects at least half of all applicants for its popular standard credit card (a far from competitive 19.4 APR), is testing a higher-interest credit card (with an APR of 19.4 to 24.9) for these people. Those lucky enough to qualify for the lowest rate (ie, the normal interest rate) will have a credit limit of [pound]400, compared to a typical standard Barclaycard limit of [pound]l,000. Capital One, a major US lender operating in the UK, is said to be charging up to 42 per cent on credit cards for poor people.

Many bankers believe the UK "prime" credit-card market is saturated, hence their interest in the subprime. Something similar is happening in the mortgage market. The UK's second-largest building society, Britannia, recently bought Platform, a lender to people unable to get mortgages from high-street sources. Platform is one of several US lenders to have entered the UK market in the past six years to sell to the poor and credit-impaired.

The back pages of tabloid newspapers are packed with ads for secured loans. These tend to start at the relatively low rates of around 12 percent, because with secured loans, lenders can and often do evict people for failing to sustain repayments. Robert Rosenberg, a barrister and credit expert, says: "The statistics show that 25 to 30 per cent of all repossession actions involve sub-prime or non-status lenders. This is a grossly disproportionate number... While one would expect the level of delinquent sub-prime loans to be higher than for prime borrowers, such figures are alarming."

Traditionally poor people have borrowed through mail-order firms for goods bought on credit and through lenders such as Provident Financial, which collects repayments each week from customers' homes -- a very expensive way of doing things, but one it says its customers like. Provident has 1.5 million UK borrowers and the number is growing. It says its typical loan is for [pound] 100 in cash, repayable over 54 weeks at an APR of 170.7, making a total repayment cost of [pound]162 (including the loan). Because of the way APRs are calculated, the cost is higher if repaid over a shorter period. Citizens' Advice Bureaux confirm that they have come across "sub-prime" lenders charging APRs in the hundreds.

Both the government and consumer lobbyists reject the idea of a maximum legal interest rate, saying it would be difficult to enforce, may become the going rate for the subprime market and, if set too low, would shut out the most risky borrowers, forcing them back into the arms of the sharks. The alarming gap between sub-prime and mainstream credit sectors will therefore remain.

Greater competition within the subprime market should be good news for at least some of its customers. Those who buildup good repayment records with the sub-prime arms of mainstream lenders will eventually be able to get credit at mainstream rates.