Many of us have taken out a loan at one time or other. What exactly is the consumer credit lending market like? Read on to find out more.
- According to the FPC, the total stock of UK consumer credit lending was £198 billion in April 2017.
- Around 85% of new cars were purchased in 2016 using dealership car finance.
- The major UK banks have outstanding loans of £41 billion, which represents 19% of their CET1 capital.
In this article, Personal Loans Now give an overview of consumer credit lending in the UK.
- The size of UK consumer credit lending
- Shared characteristics of consumer credit facilities – short-term; higher interest rates; fixed rates
- Which lending comes under consumer credit
- Categories of consumer credit lending – credit cards; dealership car finance; other consumer credit
Published twice a year, the Finance Policy Committee‘s assessment of the resilience of the UK’s financial system has a lot to tell us about the state of the consumer credit lending market. Their last Financial Stability Report was released in June 2017 and revealed striking statistics about the sector.Let’s start by looking at the size and make-up of UK consumer credit lending using the FPC’s statistics.
How Big is the Total Stock of UK Consumer Credit?
According to the FPC, the total stock of UK consumer credit lending was £198 billion in April 2017. It seemed to be continuing to grow at a rapid rate reaching an annual growth of 10.3% in the 12 months up to April 2017. Different types of lending which come under the umbrella term of consumer credit, look very diverse. However, they share some common factors.
- Common Factors Shared by Consumer Credit Facilities
- Most of the credit facilities available for consumer credit are relatively short-term. These credit facilities last five years or less. This is with the exception of overdrafts and credit cards. They offer consumers ‘revolving’ credit which allows them to borrow more money in different months or roll over their debt.
Higher Interest Rates
Although interest rates for consumer credit may vary, they’re typically much higher than the rates for mortgages. This higher rate is due to the lack of collateral for most of these financial products. It compensates the lenders for the higher risk of possible losses. With consumer credit, the interest rate remains fixed for the entire term of the loan. There is a range of personal loan interest rates available
What is the Consumer Credit Market Exactly?
You can divide the consumer credit lending market into three broad categories:
Although UK banks are responsible for 80% of lending in the categories of credit cards and ‘Other’, they’re liable for less than half of car dealership finance. Let’s look at these categories in more detail.
Credit cards can be either transactional or revolving. With the transactional use of credit cards, the full balance is repaid at the end of the month, so no interest is owed. With a revolving facility, the borrower rolls over some of the debt from month to month. They typically pay a relatively high-interest rate of around 20%.
Competition among lenders has meant some revolving credit card balances incur no interest. This encourages the borrower to move their debts to a new card (sometimes paying an upfront fee) as part of a ‘balance transfer’ offer. For a set period their borrowing is interest-free. Occasionally, you can add new debts can at zero interest during this introductory period. Major UK banks have £42 billion in outstanding debt to credit card holders. This represents about 19% of their Common Equity Tier 1 (CET1) capital (the measure of capital which banks are expected to hold to absorb possible losses).
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Consumer Credit As Dealership Car Finance
Around 85% of new cars were purchased in 2016 using dealership car finance. These car finance loans at the point of sale allow car buyers to pay a fraction of the car’s purchase price as a deposit. The rest is given as a personal loan and paid back through regular monthly instalments. With PCP (Personal Contact Purchase) at the end of the period, the borrower can make a pre-agreed ‘balloon’ payment to buy the car outright or can return the vehicle to the dealer and owe nothing.
Since 2012, the total stock of this form of consumer credit has increased by more than £30 billion. It accounts for ¾ of the growth in consumer lending in this period. Major UK banks’ exposure to this lending is £20 billion or 9% of banks’ CET1 capital. Approximately half of the debt funding for dealership car finance comes from the financial subsidiaries of global car manufacturers.
Other Consumer Credit
The vast majority of consumer credit in this third category is unsecured personal loans. These typically last 3-5 years and have fixed interest rates. Just under a quarter of these loans were taken out by borrowers who wished to debt consolidate while most of the remainder were taken out to make a large purchase such as home improvements.
The short-term nature of these loans means that their turnover rate is much faster than longer-term loans like mortgages. At the end of 2016, 75% of the major UK banks’ outstanding personal loans had been granted in the previous two years. The major UK banks have outstanding loans of £41 billion, which represents 19% of their CET1 capital.
Conclusion: UK Consumer Credit
To conclude, the size and the breadth of the consumer credit lending market show how much the way that Britons shop has changed over the past 30 years. The way credit is provided has been eased by technological changes, new forms of credit (such as PCP for buying a car) and easier access to credit facilities from financial institutions. Therefore, people turn to them more.
Equally importantly, people’s attitudes to credit have changed radically. Whether this is a positive or negative development remains to be seen. In their report, the Bank of England went to great lengths to explain that any consumer lending should be above all responsible.