With no room to cut rates, to acheive it’s current aims the Bank of England must instead turn to more direct means of influencing the money supply. The nominal growth rate of an economy can be no greater than the speed at which money is growing, and flowing around the economy. This famous economic equation – the quantity theory of money – lies behind the Bank’s decision to create billions of pounds of new money.

Whether it will succeed is still the topic of much speculation, but Thursday’s announcement means it has thrown its weight behind this new policy of quantitative easing with more weight and vigour than any other central bank in history

THE BANK OF ENGLAND’S EMERGENCY WEAPONS

Buying company debt How does it work? The Bank buys, rather than lends against, the assets of private investors, be they pension funds, insurance groups or banks. The assets are most likely commercial paper (short-term company debt) and corporate bonds. It pays for the money from a pot of cash raised by the Government through issuing gilts – in other words without increasing the amount of cash in the system. This is what the Bank has attempted to do through the Asset Purchase Facility, and is what the Federal Reserve is doing in the US.

Pros If successful, it gets to the heart of the matter, reducing the cost of credit for companies and lubricating the capital markets for companies. Because the purchases are funded by the Government it is not particularly inflationary.

Cons It has proved very difficult for the Bank to get hold of the right type of commercial debt (in other words at a good price, and a type that won’t default). Pay too little and you will leave the taxpayer facing a big bill in the coming years.

Does it work? To an extent. The Fed has bought billions of dollars worth of corporate debt, but with little impact on commercial bond spreads.

Buying gilts (Government debt)

How does it work? The Bank buys government debt off investors and banks rather than corporate debt. This is something the Bank had authorised by the Treasury yesterday. The aim is to bring longer-term interest rates down, ensuring that companies and lenders cut their own rates.

Pros: Gilts are gilt-edged, and so have very little chance of defaulting (and if the UK Government has defaulted that is a whole other kettle of fish to worry about) and there are plenty of them around, so are easy to buy.

Cons: It does not make any direct difference to companies’ cost of borrowing, instead pushing down government interest rates: nice, but not the heart of the matter.

Does it work? Yes, if by that you mean getting long-term interest rates down. The Japanese did it in the past, but it has not yet been tried by the Fed.

Creating money to buy assets

How does it work? The Bank buys assets off private investors but funds those purchases by creating money (literally, with the push of a button; metaphorically, with printing presses). This is what the Government has now approved. The aim is to increase the amount of money in the economy, which will in turn increase either economic growth, inflation, or a combination of the two.

Pros: The UK faces a possible spate of debt deflation, and there are few more powerful weapons for a central bank to use than its printing presses. It can also aim to kill two birds with one stone and cut the cost of borrowing for companies by making cash more plentiful. With interest rates at zero, there are few other more powerful tools the Bank can employ.

Cons: In normal times, such a policy is potentially highly inflationary. There is every chance the Bank is unconsciously laying the ground for an uncontrollable wave of inflation in the future. Deflation is the big enemy at present but the threat may be overblown, and printing money – quantitative easing – will create a mess of unparalleled proportions to clear up afterwards.

Does it work? Yes and no. The only other time it has been used is by the Bank of Japan. As Japan is still trapped in stagnation, many say it failed. However, there is evidence the Japanese experience would have been worse had it not taken these measures. Some also argue that the BoJ was too slow to start quantitative easing.

In total, 843,853 people had CCJs registered against them, up by a third compared to the previous year and the second consecutive year that the figure has grown.

According to the Registry Trust, the organisation that tracks the figures on behalf of the Lord Chancellor’s office, lenders are taking borrowers to court much earlier than before to ensure they have a claim on the borrower’s property.

CCJs are the first step in a legal process that can end with bailiffs at your door, demanding goods to the value of the debt. It is also the first step for a lender to obtain a charging order, which converts any unsecured debt into a secured one, enabling it to make a claim against the value of the borrower’s property.

CCJs are of course best avoided completely if at all possible, and for homeowners who have a number of debts which are proving difficult to manage and risk acquiring CCJs as a result, an oft used and viable tool is to consolidate a number of smaller, unsecured loans by taking out a debt consolidation loan using the equity in their property to secure a lower interest rate, which can serve to lower the monthly cost of repaying their debts, especially when combined with a longer repayment period.

A County Court Judgment stays on a person’s credit file for six years unless they pay the balance within a month of its issue. Even if the debt is paid within the six years, the CCJ will remain on file, but will be marked as ’satisfied’.

Even for consumers who already have CCJs, there are still solutions available to get their finances back on track. There are a number of lenders who specialise in offering debt consolidation loans to consumers with adverse credit, and who will lend to consumers with not only CCJs, but also mortgage arrears and even to consumers in an IVA or bankruptcy.

The lenders have seen bad debt levels explode in recent years as an increasing number of debtors utilise the less stringent bankruptcy laws and Individual Voluntary Arrangements. The latest set of financial figures from the banks show that Royal Bank of Scotland (owners of NatWest), HSBC, Barclays and Lloyds TSB collectively wrote off £11.6bn in bad debts from customers last year.

Malcolm Hurlston, Registry Trust chairman said: ‘Judgments are an important item in creditors’ armoury, particularly for dealing with people who are ‘won’t pays’ rather than ‘can’t pays’ and the sharp rise indicates that it is creditor behaviour that is changing.’

Mr Hurlston continued: ‘Creditors are seeking judgments as the necessary first step to obtaining charging orders against debtors’ properties, thus securing their share in any equity. It is a further warning to homeowners who may have borrowed too heavily on top of rising interest rates and escalating house prices.’

However, in certain circumstances they can be extremely useful and viable solutions; and because these 2 different positions genuinely co-exist despite the apparent contradiction, here’s a brief report for anyone considering what to do about their credit arrangements, to help you to understand some of the main pro’s & cons of secured loans.

The Pros…

Secured loans are available to most customers with a property on which it may be secured, so for homeowners who have been unfortunate enough to have racked up some adverse credit history, a secured loan can be a real help.

Secured loans are available for higher amounts. Unlike unsecured loans, which are usually limited to amounts under £25,000, a secured loan can be for almost any amount, secured loans specialist The Loan Helper for example can arrange loans for up to £500,000.

Secured loans are flexible. You can arrange your secured loan repayments over a period which suits you best, usually anywhere between 3 and 25 years.

Secured loans are a real alternative to a remortgage. If you’re considering remortgaging to free up some equity for other uses, you should consider a secured loan as an alternative. depending on the terms of your current mortgage, proprty equity, credit profile etc, a secured loan may be a more affordable option.

The Cons…

Secured loans have a reputation for charging very high APRs. However, this reputation is not necessarily justified – many secured loans are highly competetive compared with many mid-market unsecured loans. But there are of course loans available from lenders who are prepared to take on the ‘riskiest’ clients, with numerous CCJs, defaults and mortgage arrears, even bankruptcies and IVAs are no barrier to borrowing from such specialist lenders, however as you might imagine, such borrowers have much higher delinquency rates than the norm, and at the riskiest end of this market where minimal equity exists for security lenders often charge in excess of 20% APR to cover the risks involved. Again, being a specialist in this area The Loan Helper can source a secured loan for even the most extreme financial circumstances a homeowner may find themselves in.

If you’re thinking about a secured loan, make sure you do your research thoroughly and that the APR you sign for is reasonable and affordable for your circumstances. Fortunately, you can rely on your friends at The Loan Helper, where you’ll receive specialist and expert guidance and help to choose a suitable deal from the hundreds of loans to which they have access from 16 of the UK’s best lenders.

The Myths…

Your home is at risk with a secured loan, but not with an unsecured loan. Whilst it is very true that if you fail to repay your secured loan your lender can use the charge on your home to force a sale and recover their money, any creditor can apply to the court and obtain a charge on your property if the loan becomes delinquent, and once the lender has that charge your debt to them is now secured against your property, so there is little real difference other than one additional process to obtain the charge.

The ‘quick-solution’ consolidation loan. Secured loans often tend to act as magnets for borrowers with pre-existing debt problems, who see a secured loan as an instant fix to all debt problems. Whilst a secured loan can be used as a viable and valuable tool to reorganise the finances of over-committed borrowers, it is not an instant fix in itself. Once you’ve taken out a consolidation loan, you’re still in debt and whilst the consolidation of other debts will likely have reduced your overall outgoings, you must ensure that you do not then take on further credit and build back up your outgoings once more. For example, if your consolidation loan has paid off your credit card or overdraft facility, DON’T then start building up your credit card balance or overdraft all over again! Otherwise there has been no point in the consolidation, which was done in the first place to reduce your outgoings, not to give you an opportunity to get even deeper into debt.

If you have any uncertainty over your resolve post-consolidation, then terminate your credit card agreement and overdraft facility lest you succumb to the temptation of using them and continuing the spiral into unmanageable debt.

The Minister, who will open a new London office for the Money Advice Trust (MAT), which runs National Debtline, said many people did not realise that free, impartial support was at hand to help them avoid debt problems.

“My advice to people struggling with debt is to pick up the phone - there are people who can help you find a solution and avoid the sharks.”

Mr McCartney, who recently visited Illegal Money Lending Teams cracking down on loan sharks in Birmingham and Glasgow, said:

“Loan sharks are lowlifes whose primary purpose is to rip you off. Many of them will resort to intimidation and violence to take money off the most vulnerable in our communities who know of no other borrowing options.

“Often it feels like there is no alternative than to turn to loan sharks but many people don’t realise that debt advice and information is available for free. National Debtline is there to help.”

National Debtline’s advice includes getting in touch with lenders straight away to explain your difficulties, and not to give up trying to reach an agreement on repayment terms even if creditors are difficult.

The Department of Trade and Industry supports the many aspects of MAT’s activities; in particular, by providing £1million annually to National Debtline.

The Government is also providing £ 47.5 million in a two-year programme to fund face-to-face debt advice, helping tackle debt for tens of thousands of people.

This funding will pay for over 500 new debt advisers to help people get their debts under control, and will fulfil the Government’s commitment to achieve a step change in the availability of debt advice.

As part of the Face-to-Face Debt Advice project, financed by the Financial Inclusion Fund, MAT is providing training for the majority of the advisers due to be recruited over the next two years.

Consumers can call National Debtline, on 0808 808 4000.

For debt encumbered consumers who feel that turning to loansharks is their only option in obtaining the funds they need to alleviate their financial situation, there are very often legitmate lenders who, whilst charging higher rates than those offered by high street lenders to ‘prime’ borrowers. Sadly, ’sub-prime’ borrowers often believe that the only kind of lender available to them is a loanshark and don’t look for a legitmate alternative as a result. The truth is that there are niche lenders, funded by some of the biggest financial institutions in the world, whose business plan is built around high risk lending to sub-prime consumers whose circumstances may be as adverse as having dozens of CCJs, 12 month or more of mortgage arrears, or even in an IVA or bankruptcy! Such sub-prime loans do of course carry higher APRs, sometimes in excess of 20%, but nowhere near the levels charged by the loansharks, which can sometimes be over 1,000%.

Secured loans specialist The Loan Helper prides itself on delivering realistic and affordable solutions for homeowners unfortunate enough to find themselves in such dire financial circumstances. With a intimate knowledge of the lending criteria of the 16 lenders on it’s panel, The Loan Helper’s expert staff can usually help beleaguered borrowers to turn their finances around with an appropriate and affordable lending solution. You can contact The Loan Helper on 0845 003 0066 or by sending an enquiry via their website at www.theloanhelper.co.uk.

PPI is applied to a number of credit products including mortgages, loans, credit and store cards, and protects a borrower’s ability to pay the loan in case of accident, sickness or unemployment. Around 6.5 to 7.5 million policies are taken out each year

The regulator says that from January 2005 to April 2006, Capital One failed to ensure that 50,000 customers received important information about the policy - including all exclusions - although they did receive a policy summary. Affected customers were unable to check what they were covered for or if the policy was right for them.

While Capital One’s main business is providing credit cards, loans, and savings accounts from its operations centre in Nottingham, it also sells PPI on a non-advised basis to its credit card and loan customers over the telephone, internet or during the card application process. The FSA’s investigation focussed purely on credit card PPI sales. During 2005 Capital One sold approximately 335,000 UK credit card PPI policies.

The watchdog concedes that Capital One has been proactive in carrying out a full remedial programme addressing the systems and controls issues. Indeed, one part of the remedial programme ensured that those customers who did not receive the policy document had the opportunity to be compensated. The cost of this part of the programme, including potential premium refunds and settled claims, is estimated at around £3 million, of which £1.1 million related to customers after general insurance regulation started in January 2005.

This fine follows two phases of FSA work looking into PPI and the way it is sold. A third phase is underway and by the end of June 2007, the FSA will have visited over 200 PPI firms in two years.

Currently the best rates for unsecured personal loans start at just under 6%, but rates have been rising in recent weeks following the Bank of England’s three bank rate rises since August (see our related story here).

Financial data specialists Moneyfacts warned that a clampdown on lenders selling PPI with their loans products could see rates rise to at least 10%.

Margins on personal loans are notoriously low and lenders struggle to make a profit on the main product. Instead, they make their money on the lucrative insurance policies they sell along with the loans.

Moneyfacts personal finance analyst Michelle Slade said: “With the Office of Fair Trading due to review PPI later this year, if lenders are forced to lower the cost of their PPI cover and revert to a ‘pay as you go’ type policy rather than a single premium, we could potentially see best buy loan interest rates reaching double figures before the end of 2007.”

Many of the best loan deals have disappeared since the beginning of the year. Northern Rock, for example, has increased its rate from 5.8% to 6.5%.

Slade added: “Our research shows that on a loan of £5,000 over three years, only four providers now offer rates below 6%, with more than 40% of the market charging in excess of 8%, and 16% charge over 10%.

With a difference of 14.8% APR between the most and least competitive rates, shopping around for the best deal is an absolute must.”

It makes sense to act now if you are thinking about taking out a loan and grab a good deal whilst lenders are still offering low rate loans. A great starting point is to get The Loan Helper to search the market for you to find the best deal available. With a panel of 16 top UK lenders on hand and hundreds of different loan deals available between them, The Loan Helper is ideally placed to secure the best possible rate for your loan now before lenders are forced to increase them. The Loan Helper offers a free personalised secured loan quotation service with no obligation, so request yours now here.

Figures released by Alliance & Leicester claim that Since July 2006, homeowners with mortgages have actually reduced their unsecured borrowings by an average of £197 (3%). By contrast households without mortgages to pay have continued to take out loans and use their credit cards – although at a much slower pace than in the past – on average increasing their unsecured debt by £98.

In addition, the appetite for personal loans and credit card debt has diminished. Credit card borrowing grew at its slowest rate on record (4%) last year, below the level of inflation and unsecured personal borrowing grew at its slowest rate since 1994.

Alliance & Leicester believe that base rates would need to reach 8.5% before people experience the same level of financial strain as they did in 1990, when on average homeowners spent almost a third of their income (30.1%) on interest payments on their borrowings. Currently interest payments represent just under a sixth of household income (16.5%), up from the low of 14.1% three years ago.

Spokesperson Chris Rhodes said: “We have entered 2007 with a reduced appetite for borrowing and house buying since last summer. Our latest survey suggests that another base rate rise could cool the housing market further.”

The study also reported that consumers have witnessed an increase in their income, while interest rates on credit cards and loans have fallen.

Mr Rhodes adds: “Consumers have shown an unprecedented appetite to reduce their unsecured borrowing, while their incomes have continued to grow and interest costs on their unsecured borrowings have fallen. This will have taken some of the sting out of the latest increase in base rates.”

It is fair to say that as rate increases continue, unsecured borrowing will become more difficult to manage for some borrowers, and for those with home equity available, a switch from unsecured to secured borrowing becomes a viable mechanism to maintain affordability.

Mr Rhodes continue: “With the average mortgage borrower having well over £100,000 of equity in their homes, many of those who remortgaged will have taken the opportunity to pay down some of their unsecured borrowings – this may partly explain the decline we have seen in their personal borrowing and credit card balances.”

Here at loan-sense we tend to agree with Mr Rhodes on this point, although there can be many cases where borrowers may have a fixed or capped mortgage in place at a rate that’s better than anything available in the market, or they may have experienced some adverse credit since taking out their current mortgage, again barring them from re-mortgaging at a rate as competetive as their existing deal. In these circumstances, a remortgage to refinance unsecured debt is less attractive and would probably constitute bad advice, however the opportunity still exists for borrowers in these circumstances to utilise their home equity to reduce the cost of their unsecured borrowing by converting it to a loan secured by a 2nd charge on their home.

The first step to reducing your outgoings by this method is to request a free no-obligation quote from The Loan Helper. The Loan Helper has access to hundreds of deals from a panel of 16 top lenders and will be able to find you the very best deal for your own individual circumstances.

With lenders being a little restricted in the keen-ness of typical rate advertised due to the 67% qualification rule, the obvious solution is to tell potential applicants what their best rate is, hence the frequently seen phrase ‘rates from 5.9% APR’ etc, and when you see such a statement on an advertisement it seems pretty straightforward and obvious what that means - ‘this is our lowest rate’, although most savvy consumers will realise that this rate is probably reserved for applicants who represent the lowest risk.

Bizarrely however, the regulations on credit advertising dictate that a ‘from’ rate must be no lower than that which at least 10% of applicants responding to the advert will be offered.

What this means is that a lender may have a true lowest APR of e.g. 5.4%, but if less than 10% of applicants qualify to be offered this rate then the lender cannot legally state it in their advertising, being forced instead to quote a higher rate - one which at least 10% of applicants will be offered, as their ‘from APR’ - e.g. 5.9%.

This is a rule which surely frustrates any credit advertiser in such a competetive market where the top differentiator with which advertisers compete for the consumer’s attention is rate. To have a market leading rate, but be prevented from advertising it is a complete anathema to lenders, leading to a dilemma where a choice must be made; does the advertiser
a) bite the bullet and advertise a ‘from’ rate that is higher than it’s true lowest rate, but is the lowest rate that 10% of applicants qualify for.
b) ensure a 10% catchment of this rate, either by using a bottom rate slightly higher than it could be, or by keeping it super-low but extending it to slightly more risky applicants in order to reach the 10% threshold.
c) just advertise the lowest rate available irrespective of the 10% qualification rule.

in scenario a) the advertiser complies with the regulations, but is competetivley disadvantaging itself by doing so.
in scenario b) the advertiser is again compliant but must either disadvantage iteslf competetively or increase it’s risk at the low-rate end of the market, and increase which must be compensated for elsewhere at the expense of higher risk borrowers paying even higher rates.
in scenario c) the advertiser chooses to neither relinquish the competetive edge of the lowest rate nor to increase risk by offering the lowest rate to applicants who do not strictly qualify for it, instead deciding to flout the regulations and risk the consequences.

This is of course just food for thought, and there’s no suggestion that any credit advertiser is currently considering or undertaking any such thought process or advertising strategy, but considering the possibilities above to manipulate the credit advertising regulations you might wonder to yourself whenever you see a ‘from’ rate quoted in a credit advertisement, ‘what is this advertiser really saying to me?’

a) this is the lowest rate available and more than 10% of applicants qualify for it so we can state it in our ads.
b) there is a lower rate available, but since less than 10% of applicants qualify we cannot tell you about it.
c) this is the lowest rate available, and despite less than 10% of applicants qualifying for it we’re not going to give up our competetive edge by keeping quiet about it despite what the regulations say.

Well, to answer this effectively we should step back in time a little…

Before the banks became technologically sophistacted, most loan applicants would either be given the same interest rate or be simply declined as too great a risk to take on at the rate in force. However, technological advances led to the development of individual rating for risk, where the interest rate offered is based on the individual credit score of the applicant. This development became very popular with the lenders because it allowed them to have their cake and to eat it too by quoting their best rates as ‘typical’ in their promotional & marketing materials, yet only the lowest risk applicants qualified for it; meanwhile, applicants who represented a higher risk were fobbed off with much higher rates which not only offest the risk but generated much higher profits to the lenders.

After observing these dubious practices, the government took steps to prevent lenders from taking this mismatch as far as they would have otherwise liked to. The regulations now require that any advertisment for a loan must include a typical APR, and that this rate must be no lower than that which at least 67% of the resulting applications would qualify to receive.

So that is what ‘Typical APR’ means!

Tomorrow, we’ll cover the regulations concerning ‘from APRs’ - these are far from what most people think they are…

following the most recent rise in the Bank of England base rate, there are now just four unsecured loans available charging less than six per cent interest, and as the pressure continues to grow against expensive payment protection insurance often sold together with loans, these could well disappear as well.Michelle Slade, personal finance analyst at Moneyfacts.co.uk says “At this time of year, when many of us are still recovering from the after effects of our Christmas spending or perhaps trying to commit to our new year’s resolutions to sort out our finances, personal loan rates are creeping up again,”

Figures from the comparison service show since the start of January eight lenders have upped their interest rates, some by as much as eight per cent. Currently 40 per cent of £5,000 three-year loans charge more than eight per cent interest and 16 per cent of loan providers charge more than ten per cent.

“With a difference of 14.8 per cent APR, between the most and least competitive rates, shopping around for the best deal is an absolute must,” Ms Slade said.

“Choosing the wrong deal could be the difference between paying £180 per month or £151 and incurring almost £1,044 extra in interest over the three year term.”

Remember if you are shopping around for a personal loan, always check you are getting the most competitive deal, for both your interest rate and if applicable any insurance cover. Making sure you get it right at the start can save you hundreds of pounds in interest. A great starting point is to get The Loan Helper to check the best deal available for you out of the hundreds on offer from the 16 different lenders on their panel.