In debt? High street lenders will still offer reckless loans

BANKS are failing to carry out basic checks on new customers’ debts before offering them more loans and credit cards.

The Bank of England said many of the biggest lenders have no idea how much debt existing customers have racked up and whether they could cope if mortgage repayments increase.

High street lenders are stoking Britain’s debt binge with teaser rate credit cards, risky car finance and cut-price loans, it concluded.

The Bank ordered them to come clean over their high-risk loans and set out how they will address concerns by the end of September or face disciplinary action.

It suggested the boom in short-term household debt – which stands at almost £200billion and is growing at the fastest rate for 12 years – may only have happened because firms have relaxed affordability checks and cut the price of loans.

British households owe £68.2billion on credit cards and £131.5billion on personal loans, overdrafts and car finance.

The report revealed some lenders are not even carrying out proper checks on their customers’ finances.

Banks ‘rarely assessed how future shocks’ – such as a rise in mortgage repayment costs – ‘could affect borrowers’ ability to repay’, according to the report.

The disclosures heighten concerns that huge numbers of households will struggle when interest rates finally rise from record lows.

Labour MP Chris Leslie, the former shadow chancellor, said: ‘We have a dangerous cocktail of banks chasing bigger profits and turning a blind eye to whether loans are fit and proper, and consumers feeling they can get easy credit with ultra-low interest rates.

‘The Bank of England is right to push for renewed discipline, especially in such uncertain times. Because it won’t take much for the whole house of cards to collapse.’

The Bank expressed particular concern about car finance deals known as Personal Contract Purchase and credit cards with zero per cent ‘teaser rates’. More than £58billion is owed in car finance offered by motor manufacturers and banks.

As well as fuelling household debt, the Bank fears these loans could trigger losses for banks. They are based on the customer returning the vehicle at the end of a set period, leaving it to be sold by the lender.

But the Bank fears this could lead to a surplus of used cars that will drive down prices and leave the lender facing a drop in revenue. It told finance providers to ensure they have conservative estimates of vehicle values.

The Bank’s concern over credit cards centres on introductory offers with zero rate interest for a period on balance transfers and spending. It fears allowing customers to rack up more debt on plastic could trigger major losses for banks should the economy take a turn for the worse.

If customers cannot pay, or if they switch to another card company, it could blow a hole in providers’ finances.

Lenders also face risks in the market for personal loans.

Deals with an interest rate of 5 per cent or less are far more widespread and the Bank said this could be making customers more willing to get into debt, potentially affecting their ability to pay and leading to losses for lenders.

A spokesman for the new banking industry trade body UK Finance said: ‘The industry is committed to responsible lending, and continues to work closely with regulators to ensure customers can access affordable credit that meets their needs.’

‘House of cards will collapse’