8 Who are the lenders?
Here Jonquil Lowe, personal finance expert at The Open University, presents a tour of the lending industry in the UK.
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Transcript
JONQUIL
It seems we're destined, at some time or another in our lives, to turn to a lender for help with either the purchase of a home or a car, or realising something important to us, like starting a business. So it's important to get to know lenders. There are banks and building societies, but also many others. And they're all different. Let's look at them in detail.
The financial services industry is dominated by banks. They include the major 'high street' names, such as Barclays, Lloyds Banking Group, HSBC, the Royal Bank of Scotland (also just called RBS) and Banco Santander. And there are also a number of smaller banks.
Banks are mostly public limited companies (PLCs) owned by their shareholders who expect to be paid dividends. The UK Government currently has majority shareholdings in RBS and Lloyds Banking Group as a result of the support that both needed at the height of the global financial crisis of 2007. Building societies are different. They're 'mutual' organisations, owned by their customers. They were originally founded mostly in the 19th century, by groups of people who saved together to buy land on which to build their homes. Later, 'permanent' building societies emerged with which people could save, even if they did not need to acquire a home themselves.
Building societies don't pay dividends, so can in theory plough this 'saving' into better interest rates for their customers. The number of building societies is shrinking as banks take up a bigger and bigger share of the lending market. But let's not forget other types of lenders. Finance companies are in many cases subsidiaries of banks and building societies. They specialise in personal loans, and motor and retail finance (the kind of in-store loans you might use to buy a sofa or washing machine). Examples of finance companies are Carselect, CarMax Finance and Ford Credit.
Direct lenders are also often subsidiaries of banks, building societies and insurance companies. But as opposed to other lenders, they don't have a branch network; they deal with customers via the internet, post or phone, like First Direct, Nemo Personal Finance, Hitachi Personal Finance and Shawbrook Bank. Credit Unions, are cooperative organisations, often small and run on a localised basis. They can be community-based, with members tending to come from low-income groups; or work-based, with members employed by the same employer or in the same industry. One of the largest is The Open University's credit union.
The Student Loans Company (SLC) is currently owned by the UK Government (though due to be sold off to the private sector). It lends to students in higher education to enable them to meet their expenses. With the cost of higher education increasing in recent years, the SLC has become a major lender.
Then there's the alternative credit market. It consists of 'sub-prime lenders' aimed mostly at people on low incomes. They provide high risk, unsecured lending to customers who have limited or no access to mainstream credit. As a reflection of this, the cost of credit is exhorbitant. Such lenders include some loans companies, door-to-door money lenders, rental purchase shops, and pawnbrokers. This market also includes unlicensed lenders who trade illegally.
A major development in this category in recent years has been the emergence of 'payday lenders'. These provide loans - usually for short periods - typically to those with limited access to mainstream credit. Loans can be arranged quickly via the telephone or the internet. These lenders have been criticised for their high interest rates and because of their marketing and debt recovery methods.
Finally, budgeting loans are available for people on some state benefits (or Budgeting Advances for people getting Universal Credit). These are interest-free loans which have to be paid back, and in 2014 they had a borrowing limit of 1500 pounds.
The basic business model of all lenders is really the same. It involves borrowing money from the public or wholesale markets, and lending the money (at a profit) to people like you and me, to companies, local authorities and even governments.
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Although the global financial crisis in the late 2000s caused havoc with the UK financial services industry, the sector is still dominated by banks. This domination had been reinforced by the conversion of most of the large building societies to banks in the 1980s and 1990s – although all those that did convert were then either acquired by other banks or, in the case of Northern Rock Bank and parts of Bradford & Bingley Bank, were taken into public ownership during the financial crisis.
Building societies are ‘mutual’ organisations that are owned by their customers – both the customers who place their savings with them and those who borrow from them (in the form of mortgages) to buy property. This contrasts with banks, which are owned by their shareholders.