Blog: Finding a niche need amid the UK’s personal loan morass

Neil Mitchinson, director of Edinburgh Asset Finance, says his firm has identified a gap within a saturated market

Neil Mitchinson

The amount of personal debt in the UK is truly staggering and there is little sign that the nation’s insatiable appetite for borrowing – be it for the staples of life or the luxuries of life – will diminish anytime soon.

In 2017, the total amount of unsecured borrowing – for personal loans, car finance, short term loans and credit cards – reached £191 billion, an increase of nearly a third on just five years ago, according to comparison site Finder. That figure did not include student loans.

Within this sizeable financial sector there will always be people for whom debt becomes an unsustainable burden. There are many reasons for people to access a personal loan – perhaps they are consolidating other debts to make budgeting easier, or covering an unexpected event. Unfortunately, others are simply funding a lifestyle they can’t afford.

These debt casualties should take professional advice at the first opportunity, from an insolvency practitioner, an accountant or even Citizens Advice, in order to offer solutions to their situation and obtain protection from creditors.

However, most personal lending in the UK is to people who are perfectly capable of repaying their debts and the amount of debt being written off by creditors has been relatively low in recent years.

An emerging niche in the personal loan sector is asset finance, an option which is available to the surprisingly large number of people who are asset rich but, for a multitude of reasons, temporarily cash poor.

A small number of finance houses – my own is the only one in Scotland; the next nearest is in Harrogate – will offer individuals instant access to capital in the form of loans secured against high value items, such as classic cars, boats, jewellery or art.

A typical user might be a small business person operating in an environment of immediate payment demands from suppliers and late payment from clients. Cashflow has holed many an otherwise viable business below the waterline.

There are a number of attractions to asset finance: firstly, there is no other regulated way to discreetly and invisibly borrow money. Mainstream lending involves credit checks and cumbersome affordability assessments, which will normally leave a fingerprint on an individual’s credit file.

In the arcane world of credit scoring, even asking about a loan might affect the view other lenders take of an applicant in the future who is looking for assistance which is not simply based on an asset.

Secondly, handing an asset to a finance house might actually be advantageous. Valued possessions such as boats, rare cars or racing motorbikes are by their very nature seasonal, and spend much of the year in shelter from the British weather.

If a boat, for instance, is handed over to a finance house for the duration of a loan, the interest payments on the debt can be substantially offset by freedom from mooring or berthing fees, not to mention insurance cover.

Thirdly, high street banks have largely withdrawn from this kind of activity. It used to be the case that a business person who hit a bump in the road, so to speak, could go to his local manager – with whom he probably had a long business relationship – and arrange a temporary overdraft.

Local bank managers, as we all know, are an endangered species nowadays and lending decisions – which can make or break businesses – are made remotely on a one-size-fits-all, tick-box basis.

Of course, this type of personal asset finance is a mechanism which will be of relevance only to a clearly defined strata of borrowers. But self-selection of this nature reduces risk to the lender and creates scope for highly competitive interest rates.

And, since the assets being offered are highly valued, the borrower is almost guaranteed to want them back, reducing the default rate on loans of this type to negligible proportions.

The kind of relationship which personal asset finance lending fosters is not dissimilar to the late, lamented local bank manager model, and the quid pro quo from the lender is ease of communication, transparency, fairness and openness, all backed and regulated by the FCA.

Everybody wins, and that is not something that can really be said about the wider personal loan market.