Consumer Credit in the UK – Key Trends and Opportunities to 2019

Date: 2015-09

“• Consumer credit strengthening since the start of 2014, as economic recovery gains momentum

• Consumer credit has shown consistent signs of growth since 2014 – the stock of lending has decreased only once in the year and a half from then to June 2015 – for the first time since before the financial crisis. This is due to the recovery of consumer confidence, with the consumer confidence index recording its first positive number since the financial crisis in August 2014, and has been positive for every month since, up to June 2015. The demand for, and availability of, credit increased since the second quarter of 2014, and has also been a key factor.

• Record-low interest rates on personal loans driving other loans and advancements category

• HSBC became the first lender to break the 5% interest rate barrier for its GBP7,500–15,000 personal loan in September 2014, triggering a price war between mainstream lenders, as each bank or building society tried to get to the top of the comparison tables. This has shown no sign of abating in the 10 months since, with Sainsbury’s offering rates as low as 3.5% in August 2015.

• This means that lending is cheaper than ever for consumers, which has unsurprisingly given the industry a boost. The personal loan category was hit harder than any other in the aftermath of the financial crisis, and the stock of personal loans remains over GBP30.0 billion below its January 2008 total, so there is still ample room for recovery.

• Central bank rate at remains at 0.5%; rise no longer imminent, but still set for mid-2016

• The Bank of England’s (BoE) base rate has been at a record low since March 2009, at 0.5%, meaning that financial institutions have had much cheaper access to credit. This rate looks set to rise in the second quarter of 2016, however, according the Office for Budget Responsibility’s (OBR) economic forecasts. This had been expected sooner, but record low inflation and weaker global growth looks set to delay the increase by at least a quarter.

• This will cause the cost of credit to rise, as banks will have to pay more for funds. Increases will be steady, however, and the first rise will only be to a maximum of 0.75%, meaning any setback to the industry should be minor.
Retail sales soar as consumers increasingly buy higher-value products

• Total retail sales have nearly matched their entire 2014 total during the first six months of 2015, as extraordinary annual growth looks inevitable. This trend is matched in the higher-value categories of retail; both the electronics and computer categories are close to matching their 2014 annual totals. This has undoubtedly been driven by a surge in consumer confidence – as shown in the previously mentioned index – caused by an increase in real wages. Real wages had been in decline for much of the review period, but an increase in wages from the start of 2014 combined with record-low inflation in 2015 reversed this trend from the end of 2014. Clothing, food, oil and air fares have been among the categories that have significantly fallen in price so far in 2015, which has allowed consumers to spend more money on other items.

• Motor finance continues to record extraordinary growth

• Motor finance is the only typical form of consumer credit that has recorded substantial growth for a prolonged period. Both the number of new cars bought from dealerships and the value of advances paid on new cars have grown monthly (on the previous year) consistently staying at above 20% since the beginning of 2012. The value of new cars has grown every single month since June 2011, while the value of used cars bought last declined in June 2012; unprecedented growth compared to the rest of the market during this period.”

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