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Viewing report
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Personal Loans Market Assessment
Key Note Publications Ltd, Jan 2000
The present rate of increase in personal loans is too high to be sustainable. So what comes next?
We ask these questions:
How rapidly are personal loans growing?
Which companies are promoting personal loans, particularly unsecured loans, most strongly?
How sound are the prospects for repayments and for future lending?
Loans Inflation
People borrowed more in 1999, than in 1998, and advances continue to grow in 2000. Major British banking groups' gross lending, for structured personal loans, in the first four months of 2000, is equal to nearly £245 per head. This excludes credit cards, overdrafts and mortgages of all kinds. In addition, not all lenders are in the major British groups: total lending for personal loans is more than 60% higher than their figure - over £400 for each person over 18, in just four months.
Scottish Strength
The Royal Bank of Scotland Group dominates personal loans, through its many strongly branded businesses: Direct Line, Nat West, including Lombard Direct, and the Royal Bank's own loans business. In addition, the Royal Bank partners Tesco in Tesco Personal Finance and supplies funds to Virgin Direct.
Marketing effort is increasingly pitched to direct sales, from the loan suppliers themselves and from brokers, but the big banks promote their ability to offer customers a choice. Of all the high street banks, Barclays is most committed to a single brand name for products delivered through a variety of channels. Brokers increasingly specialise in borrowers who fail automated credit scoring.
Advertisers Spend More on Credit Cards Than Loans
More than £70m was spent on advertising personal loans in 1999, according to ACNielsen. Most was in print media, a lesser amount went on TV time, with the rest split between radio and outdoor sites. Expenditure on loans advertising was less than on advertising credit cards.
Nearly Three in Ten Have One or More Personal Loans
An NOP survey for Market Assessment shows that nearly a quarter of adults currently have one personal loan, and 6% have more than one - so almost a third currently have one or more personal loans. The peak age for borrowing is 25-34, when over a third admit to having one loan and 7% have two or more. Borrowing almost ceases when people reach retirement age. The typical holder of a personal loan is working full time, aged 25 to 34, and more likely to be in socio-economic groups C1 and C2 than AB or DE. Borrowing is also fairly uncommon among DEs the widowed, divorced and separated those not working, and local authority tenants.
Bigger Squeeze on Incomes
In coming years, people will experience a greater squeeze on their finances in their prime earning years. The demands of mortgage, life insurance, pension contributions, health insurance and children's higher education will, increasingly, restrict disposable incomes and thus the potential for loan repayments. It will be increasingly important for lenders to understand the psychological profiles of their loan customers and potential customers.
The prime market for loans is, and will remain, the 9 million or so households with two non-retired adults, with and without children, and single people of working age living on their own, or as a member of a household headed by someone else.
Downward Shift in Loan-holders Profile
In the years to 2005, we are likely to see credit cards taking market share from structured personal loans for amounts up to about £5,000. Low-income borrowers, who are unattractive to the card issuers, will need to continue to seek loans, often through brokers. For home-buyers and owners, flexible mortgages, secured on the value of their property, are more economic than personal loans, as a means of raising cash, because repayments are at mortgage rates even for small additional loans. The profile of personal loan holders will shift down the socio-economic and income scales, towards borrowers with poor credit ratings.
Forecast for 2005
The very large number of variables affecting the loans market makes forecasting problematic, but we expect gross lending in 2005 to be worth between £64bn and £98bn, at 1999 prices, depending on the choice of a moderately pessimistic or moderately optimistic scenario for the sector. Certainly, the current rate of growth is unsustainable, even allowing for borrowers' switching from lender to lender as they seek the best debt consolidation deals.
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