Secured loans becoming scarce

17 July 2008 / by Rachael Stiles
As the credit crunch causes lenders to tighten their criteria and reduce the amount which they are willing to lend, the secured loans market is diminishing.

When FirstPlus – a branch of Barclays – announced that it was closing its secured loan business, it was added to the already long list of other lenders that have also withdrawn from the sector since the credit crisis first began last summer.

Alliance & Leicester, Breeze Loans, Capital One Bank, LoanOne Intermediaries, Money Partners, Picture Financial, and SPPL have all closed their doors to new customers, symbolising a wind of change in the loan market.

"As the current economic downturn continues, the demand for secured loans by second charge remains." commented Michelle Slade, analyst at Moneyfacts.co.uk. "Secured loans offer consumers the option to consolidate their debts over longer terms of up to 25 years, whereas unsecured loans only offer up to a maximum term of 10 years with seven years being the norm. This is appealing to those who wish to reduce their existing outgoings by as much as possible.

Many lenders are now finding that secured loans no longer offer a viable business venture, and are facing similar issues to the consumer when it comes to securing funding from a lender. House prices continue to fall and lenders no longer have any guarantee that the equity in a customer's home will be sufficient to repay the debt if they fall into arrears.

Ms Slade explains: "If a consumer's home is repossessed, it is likely to be sold at a lower level than market value and once the first charge mortgage is repaid and legal fees etc are deducted, there is likely to be little left for the secured loan lender to recoup the debt owed to them."

The dwindling number of loan providers means that the consumer has a lot less choice when it comes to finding the best loan deals. FirstPlus' owner, Barclays, has yet to announce whether even its main loan business will continue, so with other lenders struggling, it is likely that other lenders will suffer the same fate.

"If the credit crunch can cause one of the biggest lenders in secured loans to throw in the towel, it will be interesting to see if the other providers can weather the storm." Ms Slade added.

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