5 Who are the lenders?

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 and Santander.

And there are also several smaller banks, like Metro Bank.

And there are banks that do not have a branch network like First Direct, a subsidiary of HSBC, and Shawbrook Bank. These banks deal with customers via the internet, post or phone.

Banks are mostly public limited companies owned by their shareholders who expect to be paid dividends. The UK Government currently has a large shareholding in RBS as a result of the support that is needed at the height of the global financial crisis of 2008.

Building societies are different. They’re ‘mutual’ organisations, owned by their members – these are their savings and mortgages 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 has shrunk in recent decades – particularly as a result of the conversion of most of the larger societies to banking status in the 1980s and 1990s. Consequently, banks now dominate the lending market.

But let’s not forget other types of lenders.

Finance companies are in many cases subsidiaries of banks, building societies or large companies. They specialise in personal loans, and motor and retail finance (the kind of in-store loans you might use to buy a sofa or a washing machine). Examples of finance companies are Cars select, Ford Credit, Nemo Personal Finance and Hitachi Personal Finance.

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 is currently owned by the UK Government. 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 Student Loans Company has become a major lender.

Then there’s the high-cost credit market 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 steep. Such lenders include payday lenders. Borrowing money can be arranged quickly via the telephone or the internet. These lenders have been criticised for their high interest rates and their marketing and debt recovery methods.

The high-cost credit market also includes door-to-door money lenders, rental purchase shops, and pawnbrokers as well as unlicensed lenders who trade illegally.

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 2019 they had a borrowing limit of £812.

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.