Magazine article Marketing

It's Crunch Time for Credit

Magazine article Marketing

It's Crunch Time for Credit

Article excerpt

The fallout from the global financial crisis has led to the personal loans market taking a hit, but it is set to recover in 2011, albeit slowly, writes Jane Bainbridge.

Those who got carried away with Santa's generosity and were a little flash with their cash during the festive season may find themselves searching for some credit to spread the payment - and pain - of Christmas present-buying excess.

However, where once we were a nation of debtors, the global financial crisis has forced a change of habit. In 2009, the personal loans market declined by about 36% year on year. While householders - more fearful of losing their jobs and incomes - reined in their expenditure, the banks curtailed their offering, and gaining credit became harder for everyone.

In a bid to reduce their exposure to unsecured lending, several lenders withdrew from the market altogether, while others limited loan availability to existing customers only.

At the same time, personal loans started losing out to other forms of credit, such as credit cards and overdrafts, which both offer more short-term, flexible forms of lending.

New gross unsecured loans in 2009 were estimated to be worth pounds 24bn, according to Mintel, based on Bank of England figures. In 2010, this is predicted to have fallen to pounds 20.9bn. Total gross unsecured lending in 2009 was pounds 170bn (pounds 168bn estimated for 2010), which is a decline of 23% between 2004 and 2009. Overall net consumer credit lending was negative in 2009 as consumers repaid more unsecured credit than they borrowed.

As lenders have withdrawn from the market, however, or introduced stricter lending criteria, there has been a growth in some high-cost, short-term credit markets such as payday loans and pawnbroking Peer-to-peer lending has also grown during the past 12 months.

The personal loans market is dominated by current account providers such as Lloyds TSB, Barclays, RBS, HSBC and Santander, but exact market share cannot be determined because of the lack of detailed information on loans in market reports. It is estimated these providers account for about 60% of the loans market (compared with 80% of the current account market).

The sector can be divided into two categories of provider: those that are major current-account providers, which offer loans mainly to existing customers, and those that advertise widely and compete on price to attract business (these include Alliance & Leicester, Nationwide, Sainsbury's Finance and Tesco Bank).

While the credit crunch has curtailed consumer lines of credit, more than half of all adults still owe money on some form of borrowing and a third have some level of unsecured debt, according to TGI.

Credit cards and overdrafts are the most popular form of unsecured borrowing, with just 8% having an unsecured loan (TGI).

People typically take out a loan for between pounds 4000 and pounds 15,000, and the period of the loan tends to be four to five years.

The most popular reason for seeking a loan is to buy a new car, followed by debt consolidation and then home improvements. Debt consolidation has grown in recent years as household finances have been stretched.

Despite the rise of internet transactions, most loans are arranged through branches, according to TGI. The cost of loans has increased; although the bank base rate has remained low in recent years, interest rates on personal loans have typically gone up in the past year, meaning the financial institutions' margins have also increased.

However, changes are afoot for this market as new legislation is introduced next month. …

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