THE BACKGROUND
The global credit crunch is already making an impact on British borrowing. As the economy heads for a slowdown, the UK, a nation in which 70% of people have some sort of consumer credit, is becoming less inclined to take on personal debt. In more buoyant times a number of players entered the market, seeking to challenge the dominance of big banks, but lending has tailed off in the past three years, and many are now withdrawing as demand continues to fall. The value of the sector is predicted to decrease by a further 2% to 拢197.7bn by 2012.
Britain is obsessed with money. From property prices and Bank of England interest rates to City boys' bonuses and recession speculation, not a day goes by without the newspapers picking over the latest monetary trend.
For the past few years, the UK has enjoyed a buoyant economic climate, and borrowing has been big business for most of the decade. Since the 'Loadsamoney' consumer culture of the 80s gripped the nation, many have been more than willing to borrow to ensure they get the car/holiday/lifestyle they think they deserve.
However, the headlines are now showing a greater focus on a downturn in the economy, which, inevitably, will have an impact on the lending market. All the signals are pointing to the end of the era of cheap and easily available credit. The combined effect of the global credit crunch, investigations into payment protection insurance policies and consumers' increased caution about taking on unsecured loans are combining to put pressure on the industry.
In 2007, total gross unsecured lending in the UK was 拢205bn, compared with 拢221bn in 2004, according to Mintel. It also estimates that the value of unsecured personal loans last year had fallen to almost 拢52bn, down from a peak of 拢60bn in 2004.
There are three key areas that compete with personal loans when it comes to individual debt: credit cards, overdrafts and housing-equity withdrawals. Mintel's research shows that 27% of adults have an outstanding balance on their credit card, which makes them the most popular form of credit, although transaction values have fallen in recent years.
However, the total amount borrowed on overdrafts more than doubled between 2001 and 2006, to reach 拢17bn. As house prices have risen rapidly, releasing some of the value of a property has also become a more common form of borrowing - in 2006, housing equity withdrawals were worth 拢48bn, a rise of 30% on the previous year.
When it comes to arranging a loan, the leading high-street banks are the most popular source. Almost half of those holding a personal loan arrange it through one of the big five banks, and research shows that nearly two-thirds of those seeking a loan approach their current-account provider before looking at what is offered elsewhere.
It is not surprising, then, that Lloyds TSB, the biggest provider of current accounts, also tops the personal loans table with a 13% market share. HSBC, Halifax, Alliance & Leicester, NatWest and Barclays, meanwhile, all have shares of between 7% and 8%. The bigger banks invest more in advertising their loans, and benefit from a greater presence on the high street, but it is often smaller providers such as building societies or internet banks that offer the best rates.
Recent entrants to the market include retailers, such as Tesco and M&S, and roadside assistance companies, such as the AA. US credit card companies including Capital One and MBNA have also begun offering loans. However, it is tough for such entrants to compete in a market so dominated by the UK's big banks.
Inevitably, not everyone who takes out a loan manages to keep up with their repayments. As a result, personal insolvencies increased more than twofold between 2004 and 2006, rising from 47,000 to 107,000. These figures include individual voluntary arrangements (IVAs), which have become markedly more common in the past few years, as bad debt has risen.
Debt consolidation companies have promoted IVAs to individuals as a way to substantially reduce debts and avoid bankruptcy. In 2006, 44,000 people took on IVAs, compared with 11,000 in 2004.
The five base-rate increases to interest in the year to July 2007 have also stretched consumers' resources. However, earlier this month the Bank of England took 0.25% off the base rate, reducing it to 5.25%. Many expect further reductions as the Bank attempts to stave off a recession in the UK.
Overall, men are more inclined to borrow, although women are more likely to use retailer credit cards, store cards and mail-order credit facilities. Younger consumers also appear to be more comfortable with, or more in need of, credit. The highest levels of borrowing are among 25- to 34-year-olds, 70% of whom have a consumer credit product.
The less affluent DE socioeconomic groups have the lowest take-up of consumer credit, while at the other end of the scale, 17% of well-off families have an outstanding loan.
The global credit crunch and the impact of the US sub-prime mortgage market collapse mean that banks are tightening up their lending criteria, and research from Moneysupermarket.com shows that acceptance rates for loans are falling.
The number of companies providing unsecured personal loans is also decreasing, with GE Money, Leeds Building Society and Eskimo Loans among those withdrawing from the market.
Looking ahead, there are several factors affecting the unsecured personal loans market, but the biggest impact on the sector is likely to come from a slowdown in the UK economy, which will make consumers more cautious about financial decisions.
Mintel predicts that the value of the market will decrease by 2% between 2007 and 2012, taking it to 拢51bn. The total gross unsecured lending market is expected to be worth 拢197.7bn in five years' time.
FINANCIAL WEBSITE TYPES BY LEVELS OF BROWSING FOR INFORMATION (%)
Jul May Oct Oct Oct Oct Nov %
2007 2007 2006 2005 2004 2003 2002 chng
1 General insurance 23 17 22 21 15 20 14 9
2 Bank accounts 23 18 21 25 18 24 16 7
3 Investments 7 6 6 5 5 7 5 2
4 Mortgages 6 9 7 8 5 5 6 -
5 Personal loans 5 3 4 5 5 7 4 1
6 Pensions and
life insurance 4 2 2 4 3 4 2 2
Source: MORI/Mintel
FINANCIAL WEBSITE TYPES BY LEVELS OF PRODUCT PURCHASE (%)
Jul May Oct Oct Oct Oct Nov %
2007 2007 2006 2005 2004 2003 2002 chng
1 General insurance 9 7 6 7 5 7 4 5
2 Bank accounts 7 5 5 7 5 6 5 2
3 Investments 2 3 1 1 2 2 1 1
4 Mortgages 1 1 - 1 1 1 1 -
5 Pensions and
life insurance 1 1 - 1 1 1 1 -
6 Personal loans 1 1 1 1 1 1 1 -
Source: MORI/Mintel
PERSONAL LOAN PROVIDERS BY ADSPEND (pounds)
2007 2006 2005
1 Personal Loan Express 27,911,860 4,334,493 -
2 Picture Financial 15,157,243 19,940,342 10,268,479
3 Lloyds TSB 11,509,608 13,541,633 6,358,719
4 Firstplus Financial Group 7,925,174 7,545,587 6,824,139
5 Alliance & Leicester 6,802,932 8,999,182 9,152,522
6 Loans Co 6,397,213 11,285,487 15,340,752
7 Ocean Finance 5,890,085 8,845,672 11,027,799
8 Halifax 5,478,551 6,365,711 11,880,903
9 Norton Finance 5,470,610 5,545,355 4,654,436
10 Capital One 3,814,625 11,332,897 4,423,511
Source: Nielsen Media Research
ANALYST COMMENT - ANDY THWAITES, DIRECTOR OF INSIGHT, GFK NOP FINANCIAL DIVISION
If people's thoughts, rather than their deeds, were taken literally, the British people would appear to be a frugal, Micawberish bunch, living their lives by the maxim 'neither a borrower or a lender be'. According to GfK NOP's Financial Research Survey (FRS), some 80% of the population claim that they 'hate to borrow'. This feeling stretches across all social groups and ages, but is especially strong among the oldest, where it is shared by 92% of the 65-plus age group.
Of course, what people say and what they do are often very different, and a glance at any daily newspaper belies this evidence, suggesting that levels of debt in all its forms are astronomic in the UK. In fact, the hard statistical evidence of the FRS shows that 70% of us hold some kind of credit product, be it a credit card, overdraft or unsecured loan.
Focusing purely on unsecured loans, the data, which excludes mortgages, shows a take-up of 15% among adults, with the average amount borrowed standing at 拢7400. This value has risen since 2001, but the percentage of people taking out loans has remained more or less static.
However, there are noticeable changes in what the loans are being taken out for. Some 27% of the money borrowed in 2007 was for 'loan consolidation', compared with just 21% in 2002. By contrast, car loans have fallen from 54% to 42% in the same period.
This could be evidence of increased financial prudence, or of panic following economic uncertainty in 2007. The credit crunch of 2008 certainly looks set to have major implications, though exactly how these will affect the unsecured lending market in the year ahead remains to be seen.