The latest Internal Monetary Fund (IMF) report on the state of the UK economy warned that Britain is on the brink of a housing crisis similar to the one in the USA. House prices have fallen by a quarter, repossessions are at record levels, and unemployment is rising. To add to the problem, the pound has fallen to record lows against the euro, driving the cost of household goods higher. Interestingly enough, the exact same "perfect storm" of negative economic factors converged about nine months ago in the USA. There it created what some economists predict will evolve into the worst economic crisis in that nation's history.
Because of loose lending practices by major mainstream banks in the UK, consumers helped themselves to about £1.4 trillion of debt last year, a figure roughly equal to the output of the entire British economy. Easy loans during the past few years helped stimulate property price inflation, too, so that now the average Brit spends six times their annual income to purchase a home. But in the USA that kind of price increase created a "housing bubble" that burst, wreaking havoc on the economy. A similar meltdown is now underway in the UK and is gaining momentum at a frightening pace.
As The Guardian recently reported, when financial institutions are reluctant to lend to each other due to their own credit problems and financial insecurities, they have less to offer in loans to consumers. That is certainly the case today, and credit continues to evaporate even as the Bank of England slashes its interest rates to make loans more attractive. Banks normally profit from lower rates by passing those along to customers who go on a borrowing spree, but lenders are so beaten up by their own losses that they are reluctant to lend unless customers have absolutely spotless credit.
But household expenses are becoming difficult to manage, layoffs from jobs are increasing, and many homeowner still have adjustable rate mortgages and have seen their house payments double almost overnight. Under those kinds of conditions it is easy to miss a payment deadline, but once a late payment is recorded one's credit score begins to fall. Meanwhile lenders are requiring credit scores several points higher than they used to, as a way to tighten their lending policies and avoid making more troublesome loans. British consumers are caught in the middle with inflated budgetary demands, weaker spending power, mortgages that are going off like time bombs, and nobody willing to lend them money to help solve the crisis.
However, there is one sector of the financial lending industry emerging as an ally. Many consumers have never heard of a "bad credit" loan, because the market for bad credit loans generally serves a relatively small group. Bad credit lenders specialize in making loans to people who do not have good credit, are overextended on their obligations, or have been turned down by traditional banks and mortgage companies.
But during our current subprime meltdown the number of people who qualify for these bad credit loans has grown exponentially. Bad credit loans are fast becoming the only reasonable rescue plan for many consumers, because they can get a loan without good credit - at a time when they urgently need an infusion of cash to weather the worsening storm. Major banks canceled more than 20 percent of conventional mortgage products in March. That makes loans - even for those with perfect credit - at least 20 percent harder to find. Bad credit loans may have to step in to fill the gap, and for consumers it may happen just in the nick of time.
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