Consumer debt in the UK hit a seven-year high during the fourth quarter topping £1.25 billion. Borrowing on credit cards, loans and overdrafts by Brits is now growing at an annual rate of 6.9%.
According to the Bank of England, more than £980 million was taken out in loans and overdrafts during November, sharply up from the monthly average of £728 million over the previous six months. Credit card lending fell to £269 million, from £399 million in October, but remained above the average for the previous six months.
UK CONSUMER CREDIT Y/Y CHANGE
Source: Bank of England; CardData
A new report marketed by Reportlinker found the debt run-up is due in a large part to consumer confidence recording a positive number for the first time since the credit crunch, low interest rates and a steadily growing GDP, as nearly every category of lending has grown up to July 2014. Demand for and availability of credit also grew in both the second and third quarters of 2014, which has been a key factor.
HSBC became the first lender to break the 5% interest rate barrier for its GBP7,500-15,000 personal loan, which launched a price war between mainstream lenders, as each bank or building society tried to get to the top of the comparison tables. Tesco lowered its interest rates soon after, and Sainsbury’s raised its upper limit to GBP 35,000 in October – a record high personal loan. This means that lending is cheaper than ever for consumers, which has unsurprisingly given the industry a huge 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.
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; the rate looks set to rise in mid-2015, however. This was expected sooner, but a contraction in real wages 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 very steady, however, and the first rise will only be to a maximum of 0.75%, meaning any setback to the industry should be minor.
Consumer confidence was positive in July 2014 – the first time since before the financial crisis, with a score of 1 for the month – and the index’s recent surge has helped to drive the consumer credit industry during this year. The index averaged -29.1 in 2012 and -19.9 in 2013, but just -6.8 in 2014. This improvement is expected to continue, as it has risen throughout 2014, although the BoE increasing the central bank rate could set it back temporarily.
Both demand for and availability of credit increased in the second and third quarters of 2014, as the overall industry has grown. Previously, demand had generally outstripped availability since 2009, as banks became reluctant to approve loans, though availability also remained in negative net percentage balances until 2011.
Motor finance is the only typical form of consumer credit that has recorde 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, staying at consistently above 20% since the beginning of 2012.
The student loan category is not affected by the same factors as the rest of the consumer credit industry, as growth has been driven by the number of students and cost of tuition continuing to rise. The substantial jump from GBP3.97 billion in 2012-2013 to GBP 5.66 billion in 2013-2014 represents the impact of increased tuition fees.
Much like the personal loan category, credit cards suffered massively during the credit crunch. Gross lending on credit cards has been growing since 2013, which shows the industry is recovering. Repayments have been rising at a very similar rate, however, which suggests consumers still remain wary of debt.
For more data on UK Consumer Credit access CardData®. For information and commentary on China UK Consumer Credit visit the searchable CardFlash® Library of more than 58,000 articles published since 1995. RAM Research® forecasts on UK Consumer Credit are available exclusively through CardWeb.com.®