This report reviews the demand for, and supply of, consumer credit in the UK. It contains:
An overview of the UK consumer credit market highlighting its key features and drawing relevant comparisons with other countries.
Historical information on unsecured and secured lending trends by type.
A detailed analysis of the economic factors which drive lending supply and demand.
Our forecast for unsecured credit to 2017, supported by evidence and an analysis of key risks and uncertainties.
Who is it useful for?
Consumer credit providers including mainstream banks and credit card issuers as well as alternative lenders
Investors in those businesses
Advisors including consulting firms, investment banks, lawyers and accountants
Industry regulators and policymakers
What are the sources and methodology?
This report is based on:
Analysis of a wide range of macroeconomic data from multiple sources including ONS, OBR, Bank of England, British Bankers Association, EU and OECD
Insights from our recent work and published reports covering a range of UK consumer credit market segments
Our UK consumer credit forecast model
Information from these sources has been synthesised and presented clearly and concisely with extensive use of charts and tables to illuminate points and support conclusions
UK Consumer Credit Forecast and Outlook
We expect to see modest growth in unsecured consumer credit over the next few years at a rate below that experienced from 2006-08.
In particular, growth in lending will be encouraged by:
Strengthening of the recovery in GDP
Modest wage growth below the rate of inflation increasing the need for credit on the part of consumers who are creditworthy but see costs rising faster than incomes.
Increase in the numbers of people who are in work and who are therefore likely to be in a position to borrow from mainstream sources.
Significant improvements in consumer confidence supporting increased retail sales spending and further growth in larger purchases such as new cars and home improvements.
Attitude of mainstream lenders
We believe that most lenders will continue to be relatively cautious in their approach and that interest rates on consumer credit will therefore remain high relative to base rates for the next couple of years. Nevertheless, the Bank of England Credit Conditions Survey findings do support some increase in the level of lending.
A critical point will be when the Bank of England decides to increase interest rates. It has signalled that this will come when unemployment falls to 7.0%, which it expects to happen in 2016 – although market expectations appear to be for an earlier rise, in 2015. When this happens, lenders may decide that, rather than increasing their rates in parallel, they believe the recovery is strong enough to allow a more liberal approach.
Housing market uncertainty
The housing market presents some specific uncertainty with many economists and property professionals believing that the government’s Help-to-Buy scheme will cause it to overheat in the short term. This may stimulate activity and demand for credit by improving consumer confidence but, if it does, this will increase the risk of a correction if a change of policy follows the 2015 election. Another possible impact of a rise in house prices is a return to widespread use of equity release, rather than unsecured credit, to fund consumer spending. Our forecast assumes that there is not a significant spike in house prices arising from this policy but note it as a risk.
Market conditions and mainstream lender interest rate policies are likely to continue to be favourable for alternative lenders, such as peer-to-peer lending platforms and high-cost credit providers like payday loans companies. We believe that the market opportunity for these lenders largely arises from the current conservative approach of the mainstream lenders. Alternative lenders are exploiting the market opportunity by innovating their business models and bringing out new products to better target customer segments which they see as not well served. However, for the next couple of years at least, these sources will remain a small proportion of overall lending hence will have only a limited impact on the market as a whole. In the longer term, they may lead to changes in the market which help to address some of the supply limitations arising from the UK’s relatively homogenous and concentrated banking sector.