£20bn issued in unsecured loans without proof of income

More than two thirds of the money lent in unsecured loans in the last year was granted without consumers being asked to prove their income, according to uSwitch.com, the independent price comparison and switching service.

Lending on unsecured loans totalled £29.9 billion, but uSwitch.com’s latest research shows that almost £20.9 billion of this was issued without proof of income. Sixteen months since uSwitch.com’s last investigation, the new report reveals a further 2.9 million loans have been issued, without asking for proof of income in the last year. More alarmingly, 623,700 (15%) of successful applicants were not even asked how much they earned on the application form. In fact, the percentage of consumers that were not asked for proof of salary is identical to that revealed in the November 2006 report (70%).

The banking industry has previously tried to discredit the issues raised in this study by claiming that most customers apply to their existing bank for credit. If this is the case, the bank should probably have income and affordability data on the customer and therefore would not necessarily need to ask for it again. However, this year’s study reveals that 45% of loan applicants did not apply for the loan through their bank, so the lender would have had little or no information about the applicant’s income or financial commitments.

Mike Naylor, personal finance expert at uSwitch.com, comments: “With more than 7,716 loan repayments being missed every day and record write-offs, you might think that lenders would have learnt their lesson, but the potential profits have clearly been too good to resist. While the credit crunch has forced lenders to tighten up their lending criteria, these latest amendments to the Banking Code do not go far enough to help promote responsible lending in all cases.”

The new Banking Code

The latest version of the Banking Code is pretty much the same as in 2006 as far as promoting responsible lending. One positive move is that credit reference checks are now mandatory. Companies are also required to make at least one of the following additional checks - income and financial commitments, how credit has been handled in the past and credit scoring. However the value of the checks depends on which checks are carried out. For example, a credit reference check plus credit scoring would give a pretty good idea of someone’s ability to repay debt. However, a credit reference check, in conjunction with information on how credit has been handled in the past, would be less effective.

Overall, companies should always consider income and financial commitments, credit reference information and use credit scoring.

Naylor continues: “Further credit checks could be costly and no doubt the bill would be passed back to consumers. However, it could be a small price to pay if it helps to curb the rapid growth of debt which is spiralling out of control. We cannot ignore the fact that consumers have a responsibility to borrow sensibly, but lenders really aren’t helping. As consumer debts increase by £1 million every five minutes, there is clearly a need for watertight measures to be put in place to ensure that the banks are lending responsibly.”

Consolidation

Almost 1.3 million people (31%) took out a loan in the last year to consolidate debt, but 85% of these were not asked about closing down their other debts – on average these debts were worth £6,183. This month’s amendments to the Banking Code do not appear to address the issues surrounding debt consolidation. Although it would be difficult for loan providers to ‘police’ consumers to make sure they pay off existing debt with their consolidation loan, they should at least have a responsibility to warn consumers of the dangers of not paying off existing debts.

The casualties

Unfortunately, over one in four (26%) who took out a consolidation loan went on to build up additional debts, thereby reducing the benefits of debt consolidation. On average, these additional debts were £2,221 each - totalling £744 million across the UK.

On a separate issue, 6% of all those who took out an unsecured loan ended up incurring additional debts to keep up the repayments.

Salary fibs

A staggering £4.5 billion (623,700 loans) was issued in unsecured loans in the last 12 months where recipients were not even asked for salary details during the application. 21% of these were granted to those earning less than £20,000 - less than the average salary. Borrowers are taking advantage of lenders’ lax checks - of those people who did give their salary details, 158,004 added up to 70% of their real salary. They were able to do this as only 21% of successful loan applicants were required to provide proof of their salary.

Borrowing levels

The average unsecured loan in the last year was £7,194. However, 15% of people earning £10,000 - £14,999 per year managed to get a loan of between £10,000 and £12,499 - for some this could be more than 100% of their annual salary. A whopping 55% of successful applicants took their loan out with their existing bank - many could have got a better deal elsewhere.

Overall, people could make huge savings by choosing the right loan – for example, an £8,000 loan with a rate of 6.9% APR repaid over 5 years costs £875 less in interest than the same loan at a rate of 10.9% APR.