Sector Insight: Personal Loans - Low Rates, High Interest
Loan companies are capitalising on consumers' reluctance to save for what they want.
THE BACKGROUND: Consumer borrowing is now in excess of pounds 200bn and the rising figure shows little sign of abating. Debts have spiralled due to a growing number of credit sources, from unsecured loans and offset mortgages to credit cards, and stiffer competition for business has compounded the problem. High employment and low interest rates have done little to stem the flow, although there is evidence to suggest that individual debt levels are sitting at more manageable levels.
Where once it was the norm to save for those big-ticket items, consumers today are not interested in waiting for what they want; instead, loans can provide the answer. Last year, total consumer lending was estimated to have hit pounds 219bn.
Strong consumer confidence and a low base rate have helped fuel the growth in loans, with the value of unsecured loans rising by 43% since 2000, according to Mintel.
When it comes to arranging a loan, consumers are most likely to use a name with which they are familiar and that they trust. Mintel's consumer research puts Lloyds TSB top of the list (12% of market share) followed by HSBC, Barclays Bank and Halifax. Similarly, consumers will often approach their current-account provider first because of convenience.
This choice is also informed by the fact that people generally prefer to arrange loans in person. Of those consumers arranging loans, a third opt to visit a branch, compared with 10% doing so over the telephone.
While people use the internet to research the best deals, fewer than 10% sign up online, although many providers expect this to increase considerably.
Tony Gibbons, director of personal loans at Lloyds TSB, says: 'The proportion of people going direct is rising, but borrowing thousands of pounds is an important decision and people like to talk face to face about it and shake someone's hand. While we traditionally lend to existing customers, we are getting new customers through the internet.'
Personal loans are generally used for practical purposes such as cars, home improvements and consolidating debts. Buying a car heads the list of reasons for taking out a loan, so it is not surprising that one of the main competitors to this market is specialist car finance deals, with the trend for multiple car ownership helping fuel this growth. Such deals tend to be arranged on-site by car dealers and negotiation can make them very competitive.
The personal loans market also faces competition from alternative credit products such as credit cards and value-added bank accounts, which may offer more convenience or lower rates of interest. The credit card market is particularly popular, with tempting offers of 0% APR. People tend to use credit cards for bigger purchases, having been drawn in by the credit facility and the offer of consumer protection. Zero per cent deals mean people often transfer their debt or switch cards, and may use them instead of arranging a loan.
Some credit-card providers, such as Barclaycard, have been actively marketing loan facilities. It sends statements to its users that include the amount available to them to take out as a loan. By linking Barclaycard and Barclayloan, it can exploit cross-selling more effectively and better organise its credit business.
All-in-one products are growing in popularity, especially with first-time house-buyers. These mortgages allow customers to add loans to their account, generally at the same rate of interest as their mortgage, up to a total offset limit. Their flexibility has attracted consumers, although they tend to offer the most benefit to those with savings or irregular incomes.
David Ramsbottom, One Account head of marketing, says: 'Borrowing money using your current-account mortgage, rather than taking out expensive personal loans, makes financial sense. …