Unsecured Personal Loans - UK - December 2008

Abstract

The unsecured personal loans market has always been highly competitive, with the low rates charged on loans subsidised by sales of highly-profitable PPI. This could be set to change however, as lenders' appetite for risk has diminished, lending criteria have been tightened and capital reserves are running low, all in all making banks less eager to promote their lending business. Many people are struggling to get a loan now, as the credit crunch has redefined risk, lending standards as well as the cost of consumer credit. What should emerge, however, is a more solid and sustainable lending model.

This report looks at the lack of liquidity in the banking system and the weaker appetite observed by lenders in the consumer credit markets. Of course, as we approach recession, borrowers are also tightening their belts: wanting to save more, spend less and clear their debts rather than dig themselves in deeper. One might say that the lessons of the consumer credit boom in the early noughties have been well learnt by both sides. Of course for the people that are in the market for a loan, anything less than a perfect credit history is likely to result in refusal. And as rates on loans have also increased, the market is likely to remain subdued until liquidity in the banking system is restored.

This report looks in depth at the market for unsecured personal loans. The key drivers of the market - interest rates, bad debts, liquidity in the banking system - are looked at alongside peripheral factors like the issues surrounding the sale of PPI. Alternative forms of borrowing like credit cards, overdrafts and secured loans are also looked at prior to a sizing of the market for unsecured loans. The key players in the market and their respective market shares are examined before a detailed analysis of consumer attitudes towards borrowing is presented to round off the report.

Key report themes:

• Lack of liquidity in the banking system means banks have little cash to lend.
• Tighter lending criteria - a prime-only targeting environment.
• Interest rates on unsecured loans have increased.
• Banks are not promoting their lending business.
• Weaker consumer demand as people tighten their belts.
• Fears of rising bad debts and unemployment compound the situation.