Bad Credit Loans: A Silver Lining Among The Dark Economic Clouds

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As the economic woes continue, bad credit loans from offer hope to some consumers, reports Andy Hygate.

The mortgage and loan industry continues to suffer from adverse developments in both a local and global economies, and average UK homeowners and consumers seem to bearing the worst of the negative impact. The recession is making life difficult, and there are few positive signs on the horizon. But one sector of the lending industry, the market of bad credit loans, is providing some relief while it also enjoys renewed demand for its products and services. That's because this often overlooked niche within the larger loan business is now picking up where traditional banks and lenders have fallen behind.

While most banks shrink away from any loans that appear the least bit risky - such as those requested by anyone who has a low credit score or a damaged credit history - bad credit lenders do just the opposite. They thrive on serving the demographic of consumers who have less than stellar credit, because the business model of the bad credit lender is designed to assume greater risk. Bad credit lenders seek out people with lousy credit, in other words, because that is the type of customer they are best equipped to serve. Since they are the bespoke lender for a stormy economic environment, these unique bad credit lenders tend to thrive in recessions as more mainstream and risk-averse lenders experience diminished business and smaller revenues.
Homebuyers face higher rates on fixed rate home loans from leading mainstream mortgage lenders, because those old fashioned lenders have raised the cost of their most popular deals. Nationwide is raising the cost of some of its loans by a half point, just days after it implemented another hike in rates. Woolwich is also following the trend, as are lenders including Britannia Building Society and state-owned Northern Rock - whose rates have climbed about a full point in recent weeks.

To add insult to injury, jobs and wages are falling just as the cost of borrowing goes higher. As reported in the Guardian and Telegraph, companies are recruiting fewer graduates and those rare graduates who do manage to find jobs are getting paid less.

  •     60 percent of UK companies plan to freeze worker pay or negotiate cuts, according to a new employment survey by the Confederation of British Industry (CBI) and recruitment group Harvey Nash.
  •     Meanwhile 60 percent of businesses across the UK have frozen their hiring recruitment within a portion or all of their operations and departments.
  •     More than half the businesses surveyed by the CBI do not expect to return to the recruitment pace of 2007 for at least a year, and half report that it will take them two years to get back to normal recruitment and hiring levels.

At the same time, one out of every six prime mortgages - those loans made to the most qualified borrowers with the best credit - has now fallen into negative equity. That means that the homeowner owes more on the mortgage than their home is worth. Selling in that situation does not raise enough cash to pay off the balance of the outstanding loan, and negative equity is a trend that often leads to foreclosure. Some neighborhoods in the UK now have rates of negative equity as high as 43 percent and many homeowners owe as much as £13,000 more than their homes are currently worth. Similar circumstances in the USA have already inspired an avalanche of foreclosures, even in some of the most posh neighborhoods.

That means that more borrowers are looking to loans for bad credit for alternative help. As the recession deepens, bad credit lenders will likely prosper by offering loans while other lenders tighten purse strings and charge more fees to customers already strapped for cash.


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Andy Hygate
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