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Borrowers struggle to find loans

Borrowers looking for a cheap loan at the moment can be forgiven for perhaps feeling frustrated.

You would think with interest rates still pinned to a very low level and central banks being encouraged by the government to increase their lending levels, the availability of loans at low rates would be on the increase, but the situation on the street is somewhat different.

Bankers have good memories and despite the availability of cheap wholesale loans, banks are still acutely aware of the slack practices that got them into all the trouble they have faced over recent years. The root cause of the global credit crunch was lender money to those who come barely afford to repay it and the legacy of that is borrowers today face close scrutiny when they apply for a loan.

The knock-on effect of this is that loans are still in short supply because even though money is available and banks do want to write new loans, they also want to ensure those loans are repaid on time. Interest rates may be low and the number of people looking to borrow may still be at healthy levels, but the recession is still fresh in our minds and banks remain to be convinced that borrowers can comfortably afford to repay.

Another factor is the drop in home valuations. In the past rising house prices were used as security against which a secured loan could be written. Lenders were protected by the fact that even if a borrower defaulted on repayments, the rising value of their home would ultimately cover their loan. That is not the case today with prices still falling or at best static. That lending security does not exist, so the income and ability to repay comes under closer inspection for all potential borrowers and many do not pass the test. All these factors are variable and subject to change but for now cheap loans are still in short supply.

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