Product Type: Market Research Report
Published by: Datamonitor
Published: July 2003
Product Code: R313-5837Description Introduction
Datamonitor's Personal Lending in an Economic Downturn is a vital tool for lenders operating in a more uncertain economic environment. Its goal is to make lenders aware of the relative merits of strategies that can be employed in response to a darkening of economic skies and to ensure that lenders are prepared for every eventuality.
Scope
Interviews with experts from within the lending industry
Forecasts of unsecured personal loan gross advances to 2007 under three scenarios
A variety of primary and secondary data sources
Report Highlights
A concern expressed by one lender is that with the growing availability of credit, consumers have a greater ability to juggle their borrowings, such that the true nature of their indebtedness remains hidden
In tandem with declining base rates, increased competition has also played a part in pushing down average loan prices. Indeed, traditionally the realm of the main high street banks, the lucrative personal loan market in the UK has attracted many new competitors in recent years
Lenders can target the non-standard population. While doing so can be regarded as high risk to an ill-prepared lender, given that Datamonitor believes macroeconomic conditions are the key determinant of the non-standard population, an economic downturn will result in a larger non-standard population and therefore a larger potential market
Reasons to Purchase
Ensure that you are well prepared if the UK economy, and subsequently the UK personal loan market, weakens
Determine what changing macroeconomic conditions will mean for the personal loan market over the next five years
Examine various strategies that can be employed in response to an economic downturn
Scope
Various strategies that can be employed by lenders in response to an economic downturn
Table of Contents CHAPTER 1 INTRODUCTION
Who is the target reader?
How to use this report?
What is the scope of this report?
A focus on unsecured personal loans
A household’s repayment hierarchy
Disposable income is channeled to meet five main financial commitments
Worsening circumstances hurt personal loan providers
CHAPTER 2 PERSONAL LENDING IN CONTEXT
The consumer credit market has been buoyant
Of the various components of the consumer credit market, unsecured personal loans account for the largest share
Accounting for buoyancy in the personal loan market
Four key economic drivers have contributed to growth in the unsecured personal loan market
GDP has remained fairly solid
Unemployment has fallen leading to a lower propensity for consumers to save
The Bank of England base rate is at its lowest level for 55 years
Comparing the base rate and unemployment now to that in 1991
Given the lower base rate, conditions will not deteriorate to the extent experienced in the 1990s
But there is still a need to prepare for the worst
A strong housing market has increased homeowner confidence
The problem of the manufacturing sector
The MPC faces a dilemma
Customer acquisition strategies have also inflated growth
Market prices have been falling
A declining base rate has enabled lenders to price loans more cheaply
Increased competition in the market has pushed down loan prices
Many new players have sought to compete on price
“Price is pretty much the only differentiator available to us”
The honey pot of the non-standard market
Accounting for mainstream lenders’ interest in the non-standard market
Margins remain higher in the non-standard market
Never say ‘no’ again
The problem of overindebtedness
With consumer credit at record levels, overindebtedness is a big concern
Opinion from the front line
Improving understanding of overindebtedness
The UK Debt Management Office has made it clear that debt has fallen
Conclusion
Independent forecasts support the notion that an economic downturn is possible
Lenders are unlikely to be stung by rising bad debts but….
CHAPTER 3 FORECASTING THE PERSONAL LOANS MARKET
Neutral Scenario
Growth in the personal loan market will slow due to a combination of four factors
The personal loan market will grow at 4.8 per cent on average over the next five years
Pessimistic Scenario
The consequences for the personal loan market in a mild economic downturn
Personal loan gross advances remain relatively flat to 2007
Super-pessimistic scenario
The consequences of a severe economic downturn for the personal loan market
Personal loan gross advances decrease, reaching £60.6 billion by 2007
Conclusion
CHAPTER 4 LENDER STRATEGIES IN AN ECONOMIC DOWNTURN
Lender strategies
Targeting the non-standard population
Why target the non-standard population?
Datamonitor believes that the non-standard population will increase in size as a result of an economic downturn
Under this scenario the non-standard population grows reaching 8.5 million by 2007
Why should targeting the non-standard population be regarded as a high risk strategy?
Utilizing a separate brand may be a way forward
A common pricing strategy for this market is based on risk
Launch a secured loan product
This market provides a great opportunity according to lenders
Secured loans are attractive to non-standard borrowers
Over the next few years the demand for secured loans as debt consolidation tools will increase
Northern Rock’s Together products
A brief background to Northern Rock
Explaining the Together product
Much of Northern Rock’s success can be attributed to its Together and Together Connections products
Giving customers flexibility
A risky strategy?
Flexible loans with payment holidays
Flexible loans have been an anticipated product innovation
Flexible loans have grown in popularity but are still a niche product
The opponents of the flexible loan
The proponents of the flexible loan
Focus on cross-selling Payment Protection Insurance (PPI)
The PPI market has grown
Lenders have increasingly pushed PPI sales
Increasing PPI penetration could be difficult
Online personal lending is growing
Average loan sizes are increasing
Government and media concern over mis-selling is growing
For more information….
Conclusion
CHAPTER 5 CONCLUSION
Interest rates are “holding it all together”
Even though interest rates now are not as high as during the early 1990s, the proportion by which rates are increased is what matters
Keeping track of economic projections will pay off in the long-term
CHAPTER 6 APPENDIX
Supplementary data
Definitions
Bank of England base rate
Balances outstanding
CAGR
Flexible loans
Gross advances
Loan-to-value (LTV)
Non-Standard
Off-set mortgage
Payment Protection Insurance
Recession
Secured loan
Unsecured personal loan
Relevant readings
Reports
Briefings
Future readings
Reports
Relevant links
Datamonitor Financial Services Consulting
SPP writing team
How to contact experts in your industry
List of Tables
Table 1: Total unsecured personal lending gross advances and outstanding balances, 1993-2002
Table 2: Balances outstanding in the consumer credit market by product area, 1998-2002
Table 3: Consumer credit balances outstanding per adult by product, 1998 - 2002
Table 4: Gross advances in the personal loan market under Datamonitor’s neutral scenario based forecast, 1998-2007f
Table 5: Gross advances in the personal loan market under Datamonitor’s pessimistic scenario based forecast, 1998-2007f
Table 6: Gross advances under Datamonitor’s super-pessimistic scenario based forecast, 1998-2007f
Table 7: Base rates and unemployment rates, 1987-2003
Table 8: Calls received by the National Debt Line, 2002 - 2003
Table 9: National Debt as a percentage of GDP, 1981 - 2001
Table 10: Non-standard population forecasted under a pessimistic scenario, 2003f-2007f
Table 11: Use of secured loans, 1998-2002e
List of Figures
Figure 1: The repayment hierarchy indicates how borrowers may struggle to repay a personal loan as a result of unemployment
Figure 2: The personal lending market has grown strongly in terms of both gross advances and balances outstanding, 1993-2002
Figure 3: Unsecured personal loans make up the bulk of the consumer credit market, 1998-2002
Figure 4: Both the UK unemployment rate and household savings ratio have fallen in recent years, contributing to higher consumer spending
Figure 5: Both interest rates and unemployment rates are much lower than at the time of the last recession
Figure 6: As base rates have fallen, so too have average interest rates on loans, January 1998 - January 2002
Figure 7: Timeline of new entrants to the loan market and details of the rates offered on a £5,000 loan compared to the market average, 1998 - 2002
Figure 8: The average UK adult owed £3,383 in 2002
Figure 9: Although call numbers have fallen since the start of 2003, calls received by the National Debt Line remain higher than in 2002
Figure 10: Gross national debt as a % of GDP has fallen
Figure 11: Datamonitor forecasts of unsecured personal loans gross advances under three scenarios, 2002-2007f
Figure 12: The theory behind Datamonitor’s neutral scenario based forecast
Figure 13: The personal loan market is forecast to grow at 4.8 per cent per year on average for the next five years under a neutral scenario, 2003f-2007f
Figure 14: The theory behind Datamonitor’s pessimistic scenario based forecast
Figure 15: Under a pessimistic scenario based forecast, growth in the personal loan market is negligible, 2003f-2007f
Figure 16: The theory behind Datamonitor’s super-pessimistic scenario
Figure 17: Personal loan gross advances fall under Datamonitor’s super- pessimistic scenario based forecast, 2003f-2007f
Figure 18: Size of the non-standard population under a pessimistic scenario
Figure 19: Debt consolidation accounted for 60.1 per cent of secured loan gross advances in 2002
|
|
