Banks Restricting Lending Is Leading Borrowers To Look Elsewhere
The economic slowdown started with the banking crisis
, and while many of the banks celebrated in August a return to billion pound profits, they have still failed to bring their lending back to near pre-crisis levels, and are insisting on higher interest rates and excessive demands for security. Consequently, on the 13th of September business secretary Vince Cable told UK banks that they are well capitalised and have no 'excuse to restrict credit'. The banks claim that they are not restricting their lending, and that instead there is depressed demand for loans. They also assert that new rules which require them to hold more capital will force them to restrict lending in the future. While economic uncertainty and a low base rate have meant many individuals have been paying off loans, rather than taking out new advances, it is clear that there is demand there which is not being sufficiently met by the banks.
The business secretary, Vince Cable, was primarily referring to the fall in lending to businesses, which fell for the 11th successive month in July, according to The Bank of England. Small businesses in particular have suffered something that has been picked up on heavily in the media, in part because we are relying on small, entrepreneurial businesses to revitalise the UK economy. However, it is not only businesses which are finding it hard to obtain credit. The Bank of England also reported that net mortgage lending slumped to the 4th lowest level on record, reinforcing worries of a new housing market crash.
The British public are also finding it difficult to obtain short-term loans from high street banks. This is restricting consumer spending and holding the UK economy back. Earlier this week, official data from the Office of National Statistics showed that high street spending dropped last month for the first time since January, adding to fears of a double dip recession.
People who have not been able to obtain loans from banks have increasingly started to approach other lenders. This is particularly the case with short-term loans - Google trends show there has been a dramatic increase in searches for short-terms loans, such as Payday Loans. Another reason for this increase is that average income has fallen, due to increased unemployment and pay freezes, causing more people to require loans to maintain their standard of living. For many borrowers, taking out a payday loan is a fast and efficient way of obtaining short-term credit. As long as the borrower is wise and repays the money promptly on the next pay day, this type of lending can be cheaper than a credit card charge or paying an unauthorised overdraft.
The Payday Loans industry has received some criticism recently due to reports of high interest rates being charged, but this doesnt take into account the fact that they are meant to be short-term loans, and that rates reflect a higher risk for the lender. PaydayPlus is an example of a Payday loan company which allows people to deal with their money problems very quickly as when people visit their website, their details are immediately submitted to several lenders simultaneously.
by: Alex Richards
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