Unsecured consumer credit hits all-time high
UNSECURED borrowing among UK consumers has soared to an all-time high, with peer-to-peer lending seeing the most growth of any unsecured lending product over the past five years.
PwC’s annual consumer credit confidence survey found that unsecured borrowing in the UK now equates to almost £10,000 for every household. The accountancy firm expects debt as a proportion of household income to reach around 165 per cent by 2020, a level last seen in the run-up to the financial crisis.
The report said that traditional lending products – predominantly credit cards – still dominate the unsecured credit market, but new offerings are challenging the status quo.
“P2P lending has seen the largest sustained growth rate of any unsecured lending product over the past five years – growing by a compound annual growth rate of 76 per cent between 2010 and 2015,” said the report.
“P2P lenders typically experience higher costs of funding than banks who attract cheaper deposits and are yet unproven through the business cycle. This said, they have been proven to be very effective in meeting customer needs within a niche of the market, and as a result, we expect continued growth albeit at a slightly lower pace.”
The research also found that despite high levels of borrowing and the economic uncertainty caused by the Brexit vote, Britons’ credit confidence is at its highest level since the survey began.
Just 15 per cent of respondents said they were worried about their ability to repay debt in the future, compared to 31 per cent in 2010. 13 per cent were concerned about the availability of credit for future purchases, compared to 22 per cent in 2010.
Only five per cent of Britons said they were worried about the impact of the EU referendum vote on their finances, although younger people tended to be more concerned than the older generation.
Despite high levels of borrowing, insolvencies and levels of bad debt have fallen to levels not seen since the 1990s. PwC is projecting write offs of bad debt to be around 2.5 per cent in 2016, down from 9.2 per cent in 2009.
However, the analysis also found that there are between 10m and 14m people stuck in ‘near-prime’ credit limbo. As a result of minor blemishes on their credit history, or only having a limited credit history, this large group of people finds it difficult to obtain credit from mainstream sources.
Isabelle Jenkins, UK banking and capital markets leader at PwC, said: “Unsecured borrowing in the UK remains dominated by traditional lending products. Excluding student loans, credit cards make up around 60 per cent of the total unsecured credit market, with personal loans, car finance and overdrafts contributing the majority of further outstanding debt.
“However, it has taken banks almost ten years to recover the total value of lending that they provided to consumers in 2006, with non-bank lenders having stepped in to fill the gap.
“New competitors can – and do – challenge the status quo, but they also have to prove their business model is sustainable and adaptable.”