Banks and credit card firms have been accused of fuelling a new financial crisis by allowing customers to pile up multiple – high interest – loans and credit card debt.
They are pushing loans and credit cards to cover purchases, including cars, holidays and home improvements, without proper affordability checks.
As a result, these customers face being “trapped in a vicious cycle of debt” that threatens court action, bailiffs knocking on the door, bankruptcy or poverty in old age.
Significantly, they are also in danger of being denied a home loan because these come with stringent affordability checks which means people with huge loan repayments and credit card balances will be rejected.
The situation is so serious that brokers are urging City watchdogs at the Financial Conduct Authority (FCA) to take an urgent look at the issue.
Brokers suggested that finance giants are happy to pump out these loans and credit cards because they carry high interest rates and profit margins without taking proper consideration of the fact it may disqualify people from getting a home loan.
One said: “Households can be awash with high-interest credit card debts and loans but unable to secure a mortgage. This highlights a deeply flawed financial system in serious need of reform to promote responsible lending practices.”
A second warned: “If left unchecked by the FCA, this is a worrying trend that could result in the next banking crisis.”
A third said: “More people than ever are living life on the never-never. It’s arguably at its most dangerous point ever.”
Harps Garcha, Director at Brooklyns Financial, warned: “The discrepancy in how lenders assess affordability for mortgages versus personal loans and credit cards is one of the biggest mysteries in financial services. Mortgage lenders require extensive financial details, whereas affordability checks for personal debt seem minimal.
“I recently encountered a client with over £100,000 in consumer debt on a £50,000 annual salary, who is about to retire within the next five years. How does this make sense? As for car finance, ‘affordability check’ is not even in the vocabulary.”
Industry figures published last week revealed that the balance outstanding on Britons’ credit cards has soared by £4.5 billion in the past year to £64.775 billion.
Ranald Mitchell, Director at Charwin Private Clients, told Newspage: “The rampant availability of unsecured credit to UK households without proper affordability checks is a scandalous practice that preys on the most vulnerable.
“Credit card companies and lenders extend exorbitant credit limits to lower-income households with little regard for their financial stability or repayment capacity.
“This reckless lending traps households in a vicious cycle of debt, and financial institutions’ blatant disregard for long-term consequences reveals a systemic failure to protect consumers.
“Mortgage lenders enforce stringent checks, meticulously assessing borrowers’ financial health, yet the same scrutiny is glaringly absent in the issuance of unsecured credit. This double standard in underwriting creates a debt paradox.
“Households can be awash with high-interest credit card debts and loans but unable to secure a mortgage. This highlights a deeply flawed financial system in serious need of reform to promote responsible lending practices. The FCA should take note.”
Justin Moy, Managing Director at EHF Mortgages, said people carrying credit card debt face interest rates of up to 30 percent. He added: “More people than ever are living life on the never-never. It’s arguably at its most dangerous point ever.”
Easy access to car loans is a particular issue according to Kylie-Ann Gatecliffe of KAG Financial.
“We saw a client recently who was earning £25,000 yet had car finance of £60,000. Very little affordability checks are done on this type of finance, yet it often leads to County Court Judgements and defaults, destroying a client’s credit score for a good few years,” she said.
Managing Director at Orchard Financial Advisers, Ben Perks, said: “ When you want a mortgage, the lender will often make you jump through multiple hoops to get approval. But the same institutions are throwing out unsecured loans and credit cards willy nilly.
“There needs to be more consistency. Getting a mortgage can almost be too hard while getting a chunky unsecured loan too easy.”
Michelle Lawson, Director at Lawson Financial, said: “The debt some people have been allowed to accrue, often via a few clicks on a banking app, is frightening.
“Given the rigorous affordability checks for mortgages, it’s ironic that the very same providers allow multiple credit facilities for the same person with little or no affordability checks. Given the high level of interest rates at present, this is putting pressure on already fragile household budgets and really does need looking into by the regulator.”
Stephen Perkins, Managing Director at Yellow Brick Mortgages, suggested lenders are using the credit and debt binge to cash in.
“Banks will struggle to justify how much of the unsecured lending they offer, often with little to no affordability checks or underwriting, is genuinely affordable,” he said.
“This can only be due to the much better margins available compared to mortgages, on which many borrowers have to walk across tightropes whilst blindfolded to be approved, having provided everything bar a blood sample to validate their eligibility and affordability.
“Sadly all too often, for many the personal loans, car finance and credit cards they have in place end up seriously restricting their ability to buy a home.”
Simon Bridgland, Broker/ Director at Release Freedom, said: “On the one hand, lenders are very happy to throw unsecured money at people for cars or holidays and general lifestyle spending at higher rates of interest, but when it comes to people wanting funding for secured borrowing, the dive into their finances changes from shallow to deep.”
Craig Fish, Director at Lodestone Mortgages & Protection, said: “We are seeing a worrying trend of lenders offering people untold and unjustified amounts of unsecured debt. If left unchecked by the FCA, this is a worrying trend that could result in the next banking crisis.”
“It’s not in a customer’s best interests for them to borrow more than they can afford to repay.”
