Overdrafts rise as banks toughen up lending criteria

Recent figures from the British Banking Association suggest that consumers might be turning to banks’ overdraft facilities to gain credit, instead of getting a personal loan or other form of credit. The amount borrowed on overdrafts rose in March by £217m, hitting £9.6bn in total. Although still less than the £10.2bn owed on overdrafts in May 2007, the one-month increase represents what may be a sudden shift in consumer behaviour, instigated by more restricting lending practices among UK banks.

The credit crunch of late 2007 continues to impact British banking, with banks not only more reluctant to lend to each other, but also to consumers who have anything less than a perfect credit score. According to BBA figures, the number of mortgage approvals fell once more in March; the total figure for the month of 129,300, which includes house purchases, re-mortgaging, equity withdrawal and other purposes, is the lowest on record since September 2000. The figures also show that despite a small increase in credit card lending, all other forms of unsecured lending weakened in March, as banks continue to limit their loan approvals.

For many consumers, this is a difficult time. The UK economy has thrived on high levels of debt, but many analysts have warned that such debt may be unsustainable in the long term. With the credit crunch now hitting home, not only are many of us finding it more difficult to get the loans that were once relatively easy to secure, but the rising cost of living – particularly in terms of food and energy bills – is combining to pile the pressure on many householders.

Under such conditions, many people may look to take advantage of their banks’ overdraft facilities. They are often easier to obtain than other unsecured loans, because you will be dealing with your existing bank who knows your customer track-record. Overdraft facilities can also be incredibly easy to arrange – a quick phonecall and your additional credit will be sorted. It is worth remembering, however, that overdraft facilities may incur higher interest rates than personal loans.

In addition, the amount you will be offered on your overdraft will still depend on your personal circumstances. By going to BeatThatQuote.com, you can easily compare both overdrafts on current accounts as well as typical interest rates on unsecured personal loans. By taking the time to compare the market, you can be sure you are getting the best deal for your needs.

Seeking out new forms of credit at a time when loan approvals seem few and far between may all seem rather depressing. But there are still signs, despite some of the bleak news, that we are getting better at managing our finances. BBA figures show that despite a small increase in credit card spending in March, repayments continue to outstrip new spending, as they did throughout 2007.

Personal deposits have also risen from a September 2007 low, and are now in line with the long-term average. Many of us might be experiencing some cash-flow fears right now, but as long as we keep a careful eye on our finances and get the best deals that are available to us, there is reason yet to be optimistic.

**This material is for information purposes only and should not be considered financial advice. We strongly encourage our readers not to rely solely on this content, but to seek independent advice when making financial decisions.**