Secured lending rises 37% in a year

Secured lending such as debt consolidation loans has jumped 37% in the space of a year, says a new report published today which will fuel worries about the high levels of consumer debt.

The British secured loan market was worth £14.4bn in 2002, up from £10.5bn in 2001, as growing numbers of homeowners decided to roll all their various debts into one loan secured on their house, said market analyst company Datamonitor.

More than 700,000 secured loans were taken out in 2002, each with an average value of more than £20,000. The market - which excludes traditional "first charge" mortgages - is expected to continue growing as increasing numbers of people struggle to meet the repayments on their unsecured debts such as credit card balances and personal loans.

That spells good news for consolidation loan specialists such as Ocean Finance and Norton Finance, many of which advertise their services on television and typically promise to cut people's repayments each month by replacing all of their debts with one monthly payment.

The new report comes weeks after the financial services authority sounded a warning about worryingly high levels of consumer indebtedness and the dangers of a "rapid and disorderly" economic downturn.

Growing numbers of consumers appeared financially stretched, said the regulator. Household debt is at record levels and last month it was revealed that homeowners have been cashing in on the property boom by borrowing an unprecedented £4bn a month against their rising house values. Meanwhile, mortgage lending soared to an all-time high last year.

"The [secured loan] market has been buoyed by good economic conditions, rising house prices and high levels of unsecured debt," says the Datamonitor report, which predicted the sector could be worth more than £22bn by 2007.

Like a mortgage, a debt consolidation loan is secured on the borrower's property, so if they defaulted on the agreement they could lose their home.

The unsecured borrowing binge of the past few years has raised the profile of secured loans as a tool for bringing together various forms of debt. Last year the average British adult had more than £3,800 in unsecured debt, and that year, debt consolidation accounted for more than 60% of secured lending.

While the idea of having a single monthly payment can be appealing to many cash-strapped homeowners, critics say many of the specialist lenders simply extend the repayment period to reduce the monthly outlay.

Datamonitor believes that with interest rates likely to rise in the next few years, more people will have difficulty meeting the repayments on their unsecured debts and will consider turning to consolidation loans.