Personal Loans Market Assessment: report from Bharatbook.com

The UK consumer credit market, along with other forms of borrowing, increased strongly in the early years of the 21st century. However, the growth rate has since fallen dramatically, with the ending of house-price inflation, which is even likely to reverse during the economic slowdown in 2008. While the total amount lent is still at historically high levels, personal loans are no longer as profitable as other forms of lending that carry higher interest rates or are secured against property. Some firms, such as London Scottish, have already left the market with heavy losses.

Banks remain dominant as lenders and their position is assured by their ability to command leading positions in all forms of lending. This diversifies their risk in a dynamic market and, if the market for personal loans diminishes, allows them to focus on credit cards or on secured lending. In 2008, credit cards also appear to have peaked in terms of use. The banks' focus on student loans and their participation in the provision of basic accounts indicates that they are interested in generating customer loyalty among groups to whom they do not already lend.

As a group, building societies have been weakened by the conversion to banks by all but one of the largest societies. However, they have been able to use their customer-service skills to maintain their position and to improve it within both personal and secured lending. Building societies gain in any circumstances where banks charge higher interest rates or where lenders are seen as taking unfair advantage through excessive fees. They also benefit after a financial crisis through their conservative funding policies.

Other specialist lenders — principally providing hire purchase (HP), lease purchase or direct personal loans for large capital items such as cars — are vulnerable, owing to the down turn in demand and the cost of funds. Their position is linked to their market niche and to the continuing strong position of motor manufacturers in the retail motor sales market. Despite the deregulation of the retail motor trade and the separation of manufacturers from retailers, the convenience to retail customers of finance arranged through the motor retailer remains highly attractive. Finance companies that are supported by private-equity capital or by bank groups compete with other finance companies for business. However, competition in a market with slackening consumer demand and high funding costs is itself falling off: consumers needing a loan have to persuade a lender that they are a good risk.

Retailers continue to finance purchases by their customers mainly through branded and affinity credit-card arrangements through major banks and other finance sources. The Competition Commission's report on store cards led to regulatory innovations that will further reduce the importance of retailer credit, given the high interest rates that are usually charged for it.

Insurance companies have reduced their personal-lending activity and It expects this source of finance to virtually disappear by 2012.

Credit-card lending grew in the prosperous early 2000s; however, it has suffered from the increasing caution of borrowers, and falling margins and outstanding balances fell in 2006. It anticipates that the inability to raise cash from other sources will make credit cards a greater resort for the desperate borrower in the medium term and an early indicator of economic revival.

Household debt has grown to huge levels, relative to the levels seen in other European countries. However, it is well below US levels and, provided the price of housing does not fall far, it can be sustained, depending on stable employment levels and the stability of the economy. The major problem in 2008 is the ability of lenders to offer mortgages and remortgages in the medium term, until the chaotic capital markets are restructured and interbank lending at low rates is restored.

It believes that the prospects for personal loans are worse than at any time since the early 1990s, and that the key determinants are lenders' ability to improve their credit assessment of prospective borrowers and to obtain cheap wholesale funding

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