Bad Credit Loans ‘Set For Growth’
The bad credit loan industry is set to expand as more consumers struggle to make repayments on their borrowing, research has indicated.
In a study conducted by Datamonitor, the sub-prime mortgage market increased by 28 per cent to £24.6 billion over the course of last year. Meanwhile, the sector is estimated to be worth some £31.5 billion by 2011 as it grows at an annual rate of about five per cent. According to the market analyst firm, the bad credit industry is set to grow twice as fast as its mainstream mortgage counterpart as a result of Britain’s increasing debt problems and a “difficult” economic environment.
Author of the Datamonitor report Maya Imberg said: “More consumers are unable to cope with meeting their financial commitments. High levels of consumer debt coupled with more difficult economic conditions will drive the sub-prime mortgage market forward over the next five years. With more defaulting or meeting payments late, more consumers will fall into the sub-prime population.”
She added that recent economic growth, low interest rates and property price rises have made consumers more willing to borrow and spend money. However, Ms Imberg pointed out that the sub-prime mortgage sector is set to see a slow down in growth.
Meanwhile, lenders were warned that their sector could be at risk from borrowers defaulting on their bad credit payments. According to Datamonitor, higher levels of indebtedness and rising interest rates provide a danger for credit suppliers as they offer consumers loans at higher multiples of their annual income and become “more comfortable” with assessing how borrowers will be able to make repayments.
“Despite the argument that they have sophisticated underwriting models in place, UK sub-prime lenders should take the US sub-prime mortgage crisis as a warning and ensure they are not over-exposing themselves to highly-risky loans,” the author claimed. Consequently, the company claimed that it was “essential” in the current financial climate that credit providers do not allow Britons to borrow more money than they can afford to pay back.
Earlier this month, research carried out by the Financial Services Authority (FSA) indicated that a number of bad credit lenders offer “poor practice” to their customers. According to the FSA, findings about half of respondents investigated were unable to prove if their loan products were actually suitable for borrowers. The study also revealed that about one in three companies failed to judge borrowers sufficiently in terms of their ability to make repayments.
Meanwhile, the majority of lenders were said to not be checking information applicants provide them with such as salary details as they fail to put the polices they created into place. However, the authority warned those borrowers who lie that their income is actually higher than it is in reality are committing a criminal offence. Consumers were also advised by the FSA to make sure that they are fully aware of the terms of borrowing and any subsequent risks and charges when applying for a sub-prime mortgage.
According to financial charity Credit Action, some 330 Britons are declared insolvent or bankrupt every day as they struggle to make loan repayments.
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