There has been a great deal of concern expressed about the rising levels of overall consumer debt. Government evidence showed that, in August 2004, household borrowing in Britain rose above £1 trillion for the first time. As interest rates remain at a relatively low level, higher debt repayments may well be affordable for many households. However, there is increasing concern that consumers in the UK are taking on unmanageable amounts of debt, which may well become of greater concern if the current upward trend in interest rates is maintained or if the currently benign macroeconomic climate takes a turn for the worse. Yet, at the same time, even a casual observer of the financial scene in the UK will have been struck by the increased marketing of products – including mortgages and remortgages, car loans and debt consolidation loans – specifically to people who have an impaired credit record or who are finding their existing debt difficult to manage. It might be predicted that such borrowers would be particularly vulnerable to unmanageable debt. As relatively recent arrivals on the financial scene, however, little has been written about this so-called ‘sub-prime’ lending sector outside the confines of the specialist financial press.
The research that is reported here is the first attempt to bring together and present more broadly evidence about the development of and activities within the sub-prime lending sector in the UK. As well as presenting a general picture of the sector, the research is also more specifically motivated by the impact of such activities on the sustainability of home ownership – as many of the loans are targeted specifically at the owner-occupied sector and secured against property, in the event of any default or arrears, the ultimate penalty is house repossession.
Contents
Glossary
List of abbreviations
1 Introduction
- Defining the sub-prime sector
Research approach
2 Changing context: borrowers and debt
- Mortgaging and remortgaging
Indebted Britain
Summary
3 The evolution of the sub-prime lending sector
- The development of sub-prime lenders
Drivers of growth in the sub-prime sector
Industry evolution
Summary
4 The contemporary sub-prime sector
- Segmentation and differentiation
Regulation of the sub-prime industry
Evidence on the structure of sub-prime products
Defining degrees of adversity and risk
Redemption penalties
Other charges
LTV ratios
Sub-prime niche markets
The size of the sub-prime market
5 Sub-prime borrowers’ perspectives
- Responsible lending
Consumers’ knowledge of sub-prime terms and conditions
Arrears and possessions
Payment protection insurance
Regulation
Other issues
Sub-prime credit as extortionate credit?
Selling sub-prime loans
The industry perspective: serving sub-prime customers
6 Conclusions
- Market differentiation
Sub-prime lending and sustainable home ownership
Policy issues
Research issues
Notes
Bibliography
Appendix: Sub-prime search strategy
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Lending to higher risk borrowers : Sub-prime credit and sustainable home ownership
