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What's Next for Loans?

Recent months have certainly been a period of massive change for both lenders and borrowers, but the issue many will be worrying about is the stability of the situation in the loans industry. Are the recent changes here for good or will we eventually return to the loans marketplace we knew so well only a few months ago?

Only 12 months ago the loans marketplace in the UK was a flourishing one, with lending volumes on the increase and loan rates remaining relatively stable depsite rises in base rates. Then came the nervousness brought to the public domain by the difficulties at Northern Rock. Many observers wondered whether the troubles surrounding the sub prime credit markets in the US would filter through to the UK and the situation with the UK's fastest growing mortgage provider served to confirm that. Northern Rock had expanded itself right into the middle of an accident waiting to happen. Looking back it's difficult to see why it's managers didn't see the problems they were creating for themselves. Providing attractive loans to new borrowers that grew the company at an alarming rate, when other competitors were behaving more cautiously must have rung some alarm bells.

But Northern Rock was not unique in emersing itself in high risk lending. Plenty of the world's biggest banks did exactly the same thing but on a much grander scale. Even though their situations were slightly different in that they were not providing loans directly to the general public ( they were funding a myriad of loan brokers and lending networks), they succumbed to the same problem of falling confidence in Collateralised Debt Arrangements. The world's biggest banks lost billions and billions of dollars, causing a crash in lending confidence and a stagnation of liquidity in world money markets. As a result the cash available for new loans dried up, forcing many lenders out of business and many would-be borrowers to put their loan plans on hold.

So where does that leave the loans world today? Certainly the return of confidence in lending markets will be a slow one, but the lending and borrowing of money has been a feature of the economy for as far back as we can remember and one small blip is not going to change that. People will always want to borrow money and investors will always want to offer loans on a profitable basis, it's just that the risks associated with lending will be more carefully examined and lenders will build-in plenty of contingency to their rates to cover any repayment shortfalls in the future. So expect the availability of loans to return fairly soon but don't expect the same low rates we were used to a few months ago.

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