Industry figures are divided over whether fears around the current pricing of personal loans are well founded.
Jayne-Anne Gadhia, chief executive of Virgin Money, this week warned that personal loans are currently priced too cheaply and risk another financial crash.
Speaking to the Press Association, Gadhia said: “The pricing on those loans is very low at the moment. I saw a pricing chart only last week and they are being priced at about three per cent.
“I would say that probably there is an issue there that the price of unsecured loans is not pricing in the real risk of how they might perform in a good economy, let alone in one that might have an uncertain outlook.”
Earlier this year the Bank of England warned of a “spiral of complacency” about consumer borrowing among lenders.
“The spiral continues, and borrowers rack up more and more debt,” said Alex Brazier, director for financial stability at the Bank of England
“Lending standards can go from responsible to reckless very quickly. The sorry fact is that as lenders think the risks they face are falling, the risks they – and the wider economy – face are actually growing.”
Jake Wombwell-Povey, chief executive officer of peer-to-peer investment manager Goji, said he felt concerns about the consumer lending market were valid but overblown, noting that UK households are in a more “robust place” than before previous turns in the credit cycle.
“Of course there has been innovation in the credit market since the last crash,” he said.
“One example is the growth point of sale consumer finance, including the auto finance market which is where many concerns lie, but I think many experts agree that academically this is a very sensible use of finance – financing assets over their useful economic life rather than paying cash upfront for depreciating assets.
“This can lead to good outcomes for consumers, as long as risks can be managed. I think concerns are that with rates being so low for so long people have assumed risk has naturally been removed from markets by central banks and in fact a crisis of confidence could bring all of this crashing down.”
However, Lee Birkett, chief executive officer at JustUs, said he agreed with Ghadia and that current loan rates are “completely unsustainable”.
“Unsecured lending should be at 10 per cent at least; there is a real imbalance in the price to risk at the moment, and it’s all down to the level of competition,” he said. “These loans are loss leaders at the moment.”
Iain Niblock, chief executive officer at P2P analysis firm Orca, said the consumer credit market is currently facing “challenging conditions” and pointed to changes made by Zopa to “reduce exposure to higher risk borrowers”.
He added: “This would not have been an easy decision while the platform is still overloaded with investor capital.”