The market has been
buoyed by good economic conditions, rising house prices and high levels of
unsecured debt. More than 700,000 secured loans were advanced in 2002, each
with an average value of more than £20,000. Datamonitor believes that the
secured loan market could be worth more than £22 billion by 2007.
Secured loans explained
Secured loans are second charge loans also often referred to as homeowner
loans, second mortgages or debt consolidation loans. They are secured on the
borrower's property, most often their home and so, like a first charge loan
i.e. a mortgage, should the borrower default on the loan agreement the
lender has a legal right to take possession of the property concerned.
Credit brokers are the public face of the secured loan industry
The secured loan market is dominated by a number of high profile credit
brokers such as Ocean Finance, Freedom Finance and Norton Finance. These
brokers spend large amounts on marketing campaigns and their advertising is
commonly seen on television and in national press. Lenders active in the
secured loan market such as Black Horse Finance, Future Mortgages and iGroup
maintain a much lower profile and often do not lend direct to consumers.
Credit brokers and lenders spent more than £41 million advertising secured
loans in 2002, up from less than £2 million in 1998.
Good economic conditions have driven the growth of the secured loan market
Good economic conditions have facilitated the growth of the secured loan
market in recent years. Solid GDP growth, low interest rates and low
unemployment mean that consumers are both more able and more willing to
borrow. Rising house prices have also made consumers more likely to borrow
on a secured basis. "Rising house prices have not only increased homeowners'
perceived wealth. They have also given many homeowners the ability, due to
the equity they have in their homes, to borrow for costly items such as new
cars, brown and white goods and home improvements on a secured basis,"
comments Mr. Alex Boorman, Datamonitor financial services analyst and author
of the report.
High levels of unsecured debt have raised the profile of secured loans as a
debt consolidation tool
A further driver of the secured loan market in recent years has been the
increasing level of unsecured borrowing. In 2002 the average UK adult had
more than £3,800 in unsecured debt. This level of debt has not only
heightened concerns that UK consumers are overindebted. It has also raised
the profile of secured loans as a debt consolidation tool. In 2002 debt
consolidation accounted for more than 60 per cent of secured loan gross
advances.
Secured loans can represent effective debt management strategies for many
consumers who are able to consolidate their various forms of unsecured debt
into one secured loan and hence make only one monthly payment. Since secured
loans are generally repaid over a longer period such debt consolidation will
reduce a consumer's regular outgoings although repayment of the loan will
cost more in the long-term. This type of secured loan usage features heavily
in the marketing efforts of secured loan providers.
Regulation of the secured loan market
Regulatory changes will have an important bearing on the secured loan market
in the next few years. On the one hand, the Financial Services Authority
(FSA) has chosen to exclude second charge mortgages, the term the FSA uses
for secured loans, from its new regulatory remit - from 2004 the FSA will
regulate the activities of 'advising on' and 'arranging' certain types of
regulated mortgage contract. On the other hand, a review of the Consumer
Credit Act is currently underway that could see the financial limit of
credit agreements covered by the Act raised or even removed. As things stand
currently, if the financial limit of the Consumer Credit Act is left
unchanged secured loans with a value of more than £25,000 will be outside of
the scope of both the FSA and Consumer Credit Act.
The secured loan market could be worth more than £22 billion by 2007
Datamonitor believes that gross advances in the secured loan market could
surpass £22 billion by 2007. Although economic conditions will remain fairly
steady, interest rates will rise. As this happens more consumers will
struggle to meet repayments on their unsecured debt. Debt consolidation will
therefore account for a larger share of total secured loan gross advances.
