Second charge secured loans are often overlooked as a viable alternative to remortgages. Over the past five years or so, the second charge or secured loans market has gone from strength to strength. Since 1999 the market has grown by more than 30% and I expect this trend to continue over the next year, albeit at slightly lower levels of about 20%. This growth has been fuelled by several factors: rising house prices, increased awareness of the products available and, more recently, demand for debt consolidation. The reason I expect growth to moderate is I don't anticipate house price inflation to continue at current levels.
The secured loans market is a relatively small niche, fitting between the house purchase mortgage and more general unsecured consumer credit. In fact, this niche has more similarities with the latter, not least in terms of how the market is regulated under the Consumer Credit Act which is currently in the throes of a major revision. The reason for this is that the average loan size (£15,000 to £18,000), average requested term at the outset (eight to 10 years) and the repayment method (all capital and interest) point to a different customer profile. In fact, the only similarity to a mortgage is that the loan is secured on the borrower's home.
The consumer credit market is about borrowing for general use such as car finance, holidays and debt consolidation. The comparison a borrower makes is between APRs and documentation, which should be presented in a similar way for all consumer credit products. The secured loans market is in competition with unsecured personal loans and credit cards.
There is a full spectrum of secured loan products in the marketplace from adverse sub-prime to standard prime loans – even through to those that are semi-secured because of higher levels of LTV. London Mortgage Company, through its secured loans brand, London Personal Loans, operates in the prime/light adverse credit market – in the middle of the market along with Endeavour Personal Finance, Paragon Personal Finance and FNB. We estimate that about two thirds of all secured loan lending falls into the mid-market category.
LPL does not market directly to the consumer but through a network of specialist intermediaries known as finance brokers. You will be familiar with these names from the popular press and the adverts on satellite TV. Although there are more than 2,000 finance brokers in the UK operating in this niche it is estimated that the largest 20 have a market share of about 75%. These brokers are members of the standards organisation known as FISA (Finance Industry Standards Association).
FISA has established itself as the main organisation monitoring the compliance of finance brokers undertaking CCA-regulated lending. The organisation is headed by general secretary Jim Harper and has a code of conduct for members that it strictly enforces via a team of compliance officers. These officers undertake proactive inspection visits to all members. In addition, a well respected training programme is available for members. Courses are provided on a regional basis and are usually oversubscribed. The website – fisa.co.uk – is a useful source of information on the sector.
Those lenders predominantly dealing direct with the consumer include Sterling Credit, which markets via the internet, post and telephone, and Black Horse, which has some 90 finance centres across the UK and spends heavily in the press – you will be familiar with the TV campaign featuring Carol Vorderman promoting Firstplus.
LPL started lending in early 2001 when general manager Andy Coles was recruited to head the new venture. He brought more than 15 years' experience in this market and, with a team of experienced loan underwriters, the business has grown solidly ever since.
Launching with a select panel of finance brokers, LPL spent its early years developing scaleable, customeroriented systems and investing in industry experienced staff. This investment has naturally extended to developing strong relationships with our partners – finance brokers with a reputation for quality sourcing, application packaging and customer service. In a competitive market, it is vital for us to ensure that as we expand, our service levels do not deteriorate – our brokers could simply switch to other lenders.
The opportunity to provide secured loans as an alternative to remortgaging for those borrowers looking for additional sums, particularly for non-home related items or debt consolidation, has not always been fully appreciated. Often a borrower may wish to reschedule the loan over a different term to concentrate on repaying the additional sum before the first mortgage. Alternatively, they might have a good existing mortgage product they wish to keep, or they may not want to have a combined loan that is then rescheduled over a new 25-year term. A further consideration is that the secured loan is available without incurring valuation and legal fees and a decision in principle is confirmed in a matter of hours.
When faced with these differing needs, the case for a secured loan alternative becomes clearer. Another example would be a customer with a CCJ who could potentially obtain a rate as low as 9% per annum – considerably more favourable than the credit and store card rates they are looking to consolidate.
Having said that, there are occasions when credit card borrowing is valid as a short-term solution to temporary shortfalls in a person's personal finances. Rates may be higher, but the total cost of credit need not be unreasonable.
For someone looking for a relatively small loan over a shorter repayment period, a secured loan is an alternative to remortgaging that should be considered. The key is customer choice – different products suit different needs at different times.
Upcoming changes to CAA legislation
Next year, there will be several changes to CCA legislation Following a detailed consultation process, the DTI has announced that from May 31 2005, the CCA will be amended in the following areas:
Changes to the prescribed content of documents
Introduction of new disclosure information
New provisions relating to APRs and the contents of advertisements
Changes to early settlement regulations
The introduction of these changes will improve transparency for the customer and simplify the process for some lenders who use different calculations for the early settlement of regulated and unregulated agreements