Secured loans dwindle as lenders pull out of the market

21 May 2009 / by Rachael Stiles

Another lender has pulled their secured loans range this week, adding to a growing list of other lenders that are withdrawing from the market.

Analysis of movements in the secured loan market by Moneyfacts.co.uk has found that a total of 14 lenders have stopped offering them since mid-2007, leaving just a handful of lenders left.

The dwindling number of providers in the market is largely down to supply and demand, explains Michelle Slade, analyst at Moneyfacts.

Traditionally a lending vehicle for borrowers with small amounts of equity in their home or a damaged credit history, fewer people now have sufficient equity in their homes to take advantage of secured loans due to falling house prices and increasingly tight lending criteria.

The loss of equity in borrowers' homes poses a risk to the lender, Ms Slade continues, because if a home is repossessed, once the mortgage is repaid and the fees deducted, it is likely that there would be insufficient capital remaining to repay other debts secured on the home.

Secured loans have appealed to people who wish to spread the repayments out as much as possible by taking out a loan with a long repayment term, up to 25 years on secured borrowing compared to 10 years being the norm for unsecured loans.

And, there are other reasons for the fall in loans, Ms Slade continues:

"On an unsecured loan the rate is set at outset and repayments are fixed. Most secured loan repayments move with base rate or LIBOR, but despite being in a low interest rate environment the average rate has increased from 9.9% to 12.4% in the last two years.

"Many lenders have found it is no longer a viable business option to offer secured loans in the current economic climate and we have to wonder for how long the remaining lenders will be able to survive."

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