UK consumer credit market: difficult years ahead

24th May 2007
By Maya Imberg

The UK consumer credit market is expected to experience a slowdown in lending over the coming years.

The UK consumer credit market has seen a slowdown after experiencing more than a decade of strong growth. The market delivered a poor performance in 2006, attributable to the combination of a weaker labor market, high consumer debts and weakened consumer confidence. As a result, lenders are expected to struggle over the next five years.

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According to a Datamonitor report, in 2006, gross lending contracted by 4.5% compared to 2005, from 217.5 billion to GBP207.8 billion. Consumer credit advances are forecast to grow at an annual compound average rate of 3.2% to reach GBP229.4 billion in 2011.

These figures indicate that consumers cut down considerably on spending and aimed to repay more of their debts in 2006. As a result, the average UK adult consumer credit debt rose slightly, from GBP4,510 in 2005 to GBP4,522 in 2006.

The market is forecast to perform poorly once again in 2007, as consumers remain saddled with high levels of debt in a relatively high interest rate environment. Market recovery, although slow, is not expected before 2008. The personal loan market has followed a similar trend to the consumer credit, with gross lending also contracting over 2005 and 2006.

Given the current difficult lending environment and high levels of personal indebtedness, lenders operating in the personal loan market have had to review their pricing and acquisition models. Consequently, consumers with a poor credit history will find it harder to access credit or pay higher prices as lenders in the personal loan market are changing their pricing tactics.

While some continue to focus mainly on prices, others are looking at reducing risk. A number of major lenders have shifted their focus to better quality lending, even if that implies lower volume of business. Moreover, lenders with a significant customer base are placing greater efforts on targeting their existing customers while contracting personal loan business. This will provide lenders with the advantage of knowing their financial status and their repayment habits, thus allowing lenders to choose customers who are unlikely to default.

Such a situation implies that customers with good credit records can expect to benefit from lower interest rate offers, yet those with poor credit records will face more difficulty in accessing credit and will pay higher rates than was formerly the case. In light of these changes, the consumer credit market is expected to suffer and struggle to maintain a robust lending service over the next few years.
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