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Viewing report
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Personal Loans Market Assessment 2006
Key Note Publications Ltd, Nov 2006
The UK consumer credit market increased strongly in the early years of the 21st century, along with other forms of borrowing. However, the growth rate has fallen with the slowing of house-price inflation. While the total amount lent is still rising at historically high levels, personal loans are no longer as profitable as other forms of lending that carry higher interest rates or are secured against property.
Banks remain dominant as lenders, and their position is assured by their ability to command leading positions in all forms of lending. This diversifies their risk in a dynamic market and, if the market for personal loans diminishes, allows them to focus on credit cards or on secured lending. The banks' focus on student loans and their participation in the provision of basic accounts indicates that they are interested in generating customer loyalty among groups to whom they do not already lend.
Building societies have been weakened as a group by the conversion to banks by all but one of the largest societies. However, they have been able to use their customer-service skills to maintain their position and to improve it within both personal and secured lending. Building societies gain in any circumstances where banks charge higher interest rates or where lenders are seen as taking unfair advantage through excessive fees.
Other specialist lenders — principally providing hire purchase (HP), lease purchase or direct personal loans for large capital items such as cars — remain strong. Their position is linked to their market niche and to the continuing strong position of motor manufacturers in the retail motor sales market. Despite the deregulation of the retail motor trade and the separation of manufacturers from retailers, the convenience to retail customers of finance arranged through the motor retailer remains highly attractive. Finance companies that are supported by private-equity capital or by bank groups compete with other finance companies for business. Competition is likely to lead to reduced margins if the market for new cars or other consumer durables weakens, or if household income ceases to rise robustly.
Retailers continue to finance purchases by their customers, but the trend is strongly downwards as store loans are replaced by branded and affinity credit-card arrangements through major banks and other finance sources. The Competition Commission's report on store cards is likely to lead to regulatory innovations that will further reduce the importance of retailer credit, given the high interest rates that are usually charged for it.
Insurance companies are rapidly reducing their personal-lending activity, and Key Note expects this source of finance to virtually disappear by 2012.
Credit-card lending has grown quickly since 2001; however, it has suffered from the increasing caution of borrowers and outstanding balances are falling in 2006. The report anticipates that a return to high levels of house sales would revive this category of lending, but that regulatory pressure and debt financing innovations will suppress margins and make it difficult to achieve the profitability seen in previous years.
Household debt is a growing worry. However, although the overall debt level in the UK is high relative to the levels of other European countries, it is nowhere near US levels and has the capacity to rise further, depending only on the confidence of consumers, the stability of the economy and the ability of lenders to raise money cheaply. Current debt-restructuring activity is feverish, reducing the returns to lenders through the terms of repayment agreements.
It is thought that the prospects for personal loans are brighter than current trends suggest, and that the key determinants are lenders' ability to improve their credit assessment of prospective borrowers and to modify their product offer to appeal to potentially profitable market segments.
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