We are experiencing a rapid growth in UK consumer credit lending. In this article, Personal Loans Now take a look at the various factors that are causing this significant increase.
- The value of UK consumer credit reached £198 billion by April 2017
- Around 85% of cars were bought by car financing in 2016
- It’s never been so cheap or so easy to borrow money
- Banks have loosened their credit scoring criteria for non-credit card unsecured lending
- How large consumer credit lending is in the UK
- Reasons for the rapid growth in UK consumer credit lending –
- positive economic conditions & easier access to credit
- Dealership car finance
- Technological changes
- Intense competition among lenders
In their twice-yearly publication the ‘Finance Stability Report’, the Finance Policy Committee (FPC), which is a sub-committee of the Bank of England, assesses the resilience of the UK financial system and highlights the main risks to stability. Analysing what their report says can tell us a great deal about consumer credit in the UK. Before explaining why it’s growing, let’s see how big the market is.
How Large is Consumer Credit Lending in the UK?
In their most recent report (Issue No. 41 published in June 2017), they researched about the rapid growth of UK consumer credit lending. They found that consumer credit (covering credit cards, dealership car finance, personal loans including overdrafts, lending from credit unions and other smaller non-bank money lenders such as payday loan companies) had reached £198 billion as of April 2017. Although the amount owed for UK mortgages at £1.3 trillion is seven times larger, much of this consumer credit lending is unsecured loans like unsecured loans for bad credit with no guarantor.
In the 12 months to April 2017, they found that consumer credit lending grew by 10.3%. This is the fastest annual growth since 2005 and is increasing much faster than household incomes. Money owed on credit cards and for personal loans accounted for more than half of this growth. Around half of the net consumer lending is from banks and the amount owed is divided equally between the UK’s major and smaller banks. The FPC said it’s expected to continue to grow throughout 2017 although the growth in household income is predicted to stay weak.
Reasons for the Rapid Growth in Consumer Credit Lending
There are some explanations put forward by the FPC to account for this growth in lending through consumer credit. Let’s look in more detail at these factors which account for this shift in the supply of credit.
Dealership Car Finance
The fastest expansion in UK consumer credit lending has been due to the increasing popularity of loans to car buyers at the point of sale under dealership best car finance deals. This hire purchase type of agreement has seen an annual growth of 20% since 2012. In this period, it has increased by more than £30 billion and represents ¾ of the total growth in consumer credit. In statistics for car purchases in 2016, around 85% of cars were bought in this way (compared to about half in 2009). It shows shows how much there has been a structural shift in the way people now purchase cars in the UK. In fact, this method of funding the purchase of a car is probably the main reason why the number of new car registrations were 30% higher in 2016 than in 2012.
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The increasing popularity of online shopping and the growing use of contactless cards both show how the way consumer finance is provided to borrowers has changed drastically over the past few years.
Intense Competition between Lenders
It’s never been so cheap or so easy to borrow money. This is partly due to the competition between different financial institutions. The interest rates on unsecured bad credit personal loans with no guarantor in the uk have fallen since 2013. Also, banks are offering longer interest-free periods to new credit card customers to attract new business. The average length of this interest-free period has doubled since 2011.
Many financial institutions now also try to attract custom by the use of a ‘balance transfer’ offer. In this deal, borrowers move their debts to a new card (in some cases paying an upfront fee) and for a set period pay no interest – even on new purchases in some agreements.
Positive Economic Conditions & Easier Access to Credit
These falls in the prices of borrowing are because lenders consider the economic conditions in the country to be ‘benign’. At present, the loss rates on consumer credit lending are low. The arrears are lower than at any time since the end of the crisis. This makes financial institutions are more likely to lend money and to underestimate the risks involved with doing so.
Banks have also loosened their credit scoring criteria for non-credit card unsecured lending since 2013. From a Joint Bank/FCA analysis of data from credit reference agencies, there has been a slight deterioration in the standard of credit scores on new consumer credit lending during 2015-17. These scores are used as input for underwriting decisions by lenders.
It’s therefore easier for households with lower credit scores to access consumer credit such as bad credit homeowner loans UK. It is also another reason for the growth in this lending. As these borrowers can access credit more easily and can make regular payments in the favourable economic conditions, this, in turn, improves their credit score. It also means further consumer credit will be offered to them in the future.
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Reasons for icrease in UK consumer credit – Conclusion
Consumer credit has never been easier to obtain, and you might think that this is a good thing as it helps both consumers and the country’s economy. However, the FPC expresses some concern that financial institutions aren’t taking the necessary steps to ensure that they’re managing and pricing the risks of lending appropriately. Conditions might have led them to be complacent about weighing the risks of extending credit to some consumers.
The FPC said that these firms are their first line of defence in preventing a crisis from occurring by lending responsibly. They have called on both the PRA and FCA to review the situation to make sure banks are protecting themselves, their borrowers and ultimately the UK economy itself.