Personal loans should comply with mortgage affordability rules

Ryan Bembridge

November 2, 2016

Large personal loans should be affordability stress tested to the same standard as first and second charge mortgages, Steve Walker, managing director of specialist mortgage broker Promise Solutions has warned.

Walker was speaking after Lloyds Bank increased its maximum personal loan limit to £50,000 – a comparable sum to a typical second charge loan.

But the Lloyds product is more expensive than most second charges, with rates starting from 6.8% for loans between £35,001 and £50,000 over one to seven years.

Walker said: “Let’s hope for such large loans, repaid over a short period, Lloyds apply the same level of affordability tests and stress testing we see in the mortgage market.

“First and second charge brokers get some bad press for arranging consolidation loans but in reality we are often helping customers who have taken out unsecured finance where the original lenders didn’t adequately check the loan was affordable.

“If borrowers find they are struggling to repay one of these large loans they might be shorter on options when it comes to restructuring their finance without damaging their credit file.”

Ray Boulger, senior technical manager of John Charcol, thinks the closer alignment between unsecured and second charge loans will ultimately benefit the end consumer.

He said: “Anybody with loads of equity in their property will find a secured loan cheaper; people who don’t have equity will find an unsecured loan cheaper.

“The key factor when deciding whether an unsecured loan is a suitable alternative to a second charge is the cost of monthly payments.

“If a second charge loan is over 20 years and an unsecured loan seven years you might use the former because it’s affordable even if the latter is cheaper.”

Now lenders are upping their personal loan limits and second charge lending has fallen in line with first charge regulation, Boulger reckons major banks should get on board with the second charge market.

He added: “I do think that there is an opportunity for first charge lenders including major banks to come into the second charge market now it’s regulated.”

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