Product Type: Market Research Report
Published by: Mintel International Group Ltd.
Published: September 2002
Product Code: R560-567Description This report examines the current operating environment, the key players and the issues affecting the UK sub-prime lending market. Some commentators refer to it as the impaired credit or non-status credit market.
In recent years sub-prime lending has become an increasingly important business line for a growing number of new and existing financial services businesses in the UK, providing many new jobs in different regions of the country.
The growth of sub-prime lending in the UK has primarily been the result of the successful transfer of business models from the US. These models enable potential borrowers who do not pass the credit scoring threshold of mainstream lenders to be eligible for credit, albeit at higher rates and for lower amounts. Sub-prime lending is mostly applied to the mortgage market, but is also found in the car finance, personal loan and credit card markets.
Last year Mintel's Sub-Prime Lending report estimated the overall number of sub-prime consumers to be 3.2 million, rising to 3.65 million in 2005, depending on underlying economic and socio-demographic trends.
Sub-prime lenders have been greatly aided by being launched during a period when the UK economy has been particularly buoyant on the back of strong employment growth, rising incomes and low interest rates. With competition among lending institutions intense, and margins on mainstream consumer credit (mainly credit cards, personal loans and car finance plans) and mortgage lending being squeezed, much greater interest is now being shown in the sub-prime market as a target business area for acquiring higher margin lending business. High risk is not necessarily a bad risk.
For many years home credit companies in the UK have operated in the low- and moderate-income (LMI) segment, providing low value credit, collected door to door on a weekly basis by a team of agents. Many of these clients will be 'sub-prime' should they seek other credit facilities, although they have a very different business model to the new breed of US style sub-prime lenders.
Using a mixture of trade, desk and specially commissioned consumer research, this report updates Mintel's 2001 Sub-Prime Lending report against a backdrop of concerns over indebtedness, financial exclusion, economic uncertainties and increasing legislation.Table of Contents Introduction and Abbreviations
Global information and research
Consumer research
ACORN
Abbreviations
Executive Summary
Credit providers see better revenue prospects in sub-prime market
Sub-prime mortgage market dominated by young specialised lenders
Far greater variation in consumer credit market of sub-prime lenders
Growing regulation will stifle innovation
The future is hard to see...but the sub-prime market is well-established
Background
Born in the USA
A range of definitions
Sub-prime is the most used term in the mortgage market
Financially marginalised rather than sub-prime tends to define the consumer credit market
Too much debt?
Growing consumer protection
Market Factors
A legacy of the early-1990s recession
The need to boost margins attracts new entrants
Sustainability of home ownership
New social trends
A benign economic climate
Figure 1: Consumer confidence, by income band, January 1996-July 2002
Figure 2: Index of households' present financial position - highest and lowest income bands, July 2001-July 2002
People and Technology
Concern over credit repair companies
Negative publicity over onerous credit terms will always paint a poor picture of the sector
High DMC adspend attracts customers
Market Size and Segmentation
Mortgage lending - up, up and away
The emergence of new players
Figure 3: Gross advances, by lender type, 1996-2001
Mintel consumer research suggests 20% of mortgages may be sub-prime
Figure 4: Mortgage holding and credit experience, July 2002
How the sub-prime mortgage industry works
Underwriting skills at the heart of sub-prime mortgage business model
Securitisation ensures healthy margins can be achieved
Packagers are a vital part of the process
Consumer credit - continuing to fuel the economy
Figure 5: Consumer finance market activity, May 2002
Figure 6: Types of lender used, 1998-2002
Rise in near-prime credit card accounts
Figure 7: Credit cards in issue, number of transactions and average card expenditure, 1996-2001
Some 5% of card holders are estimated to be 'sub-prime' borrowers
Unsecured personal loans show rapid increase in take-up
Figure 8: Purpose of unsecured loans, 2000
Almost 1 in 10 personal loan holders are sub-prime
Motor Finance
Car demand at record levels
Figure 9: The consumer car finance market, by type of car, 1995-2001
Types of finance
The car finance market attracts sub-prime lenders
Products and Providers
Growing range of mortgage products to choose from
Self-certification mortgages
Current Account mortgages
Narrowing of gap between features of mainstream and sub-prime mortgages
Doubling of number of sub/near-prime mortgage providers in past year
More mainstream lenders likely to enter the market
GMAC-RFC and Kensington are market leaders in the sub-prime mortgage market
GMAC-RFC
Kensington Mortgage Company
Consumer Credit
Consumer credit providers offer more flexibility
Consolidation loans offer 'an easy way out of debt'
Baines & Ernst
Secured personal loans allow lenders to avoid high APRs
Brokers play a key role in the personal loan market
Ocean Finance
Freedom Finance
Personal loans for the less affluent
Provident Financial
Cattles
Credit cards are available, but at a price
The UK impaired credit card market lags behind that of the US
Linking finance to used cars
Yes Car Credit
Advertising
Freedom Finance and Ocean Finance both spent £7.7 million on advertising in the last year
Figure 10: Personal loan advertising expenditure, with selected specialist lenders, years to June 2001 and June 2002
Sub-prime car finance providers heavily promote their services
Figure 11: Car finance advertising expenditure (excluding manufacturer schemes), years to June 2001 and June 2002
Mortgage advertising expenditure falls sharply in the last year
Figure 12: Mortgage advertising expenditure, with selected specialist lenders, years to June 2001 and June 2002
The Consumer
Slight increase in penetration in credit products held
Figure 13: Ownership of main credit products, July 2001 and July 2002
Credit product growth strongest among C2DE social groups
Figure 14: Credit product penetration, by socio-economic group and age group combined,
July 2001 and July 2002
Sharp increase in credit penetration among low income households
Figure 15: Credit product penentration, by low-income households, July 2001 and July 2002
Figure 16: Credit product penetration, by age finished full-time education, July 2001 and July 2002
A ready availability of consumer credit
Figure 17: Experience of obtaining consumer credit, July 2002
C2DEs 16-34 most likely to be refused credit
Figure 18: Experience of obtaining consumer credit, by socio-economic/age group, July 2002
The family lifestage group have the most pressing credit needs
Figure 19: Experience of obtaining credit, by lifestage, July 2002
Single parent families are most likely to seek sub-prime consumer credit
Figure 20: The effect of children and marriage on the demand for credit, July 2002
Profile of consumer credit users
Figure 21: Profile of consumer credit users, July 2002
Current account providers are the favoured source of finance
Figure 22: Sources of finance applied to, by age/socio-economic group, July 2002
Credit sought from a much wider number of sources by non-mainstream borrowers
Figure 23: Sources of consumer credit applied to, by type of borrower, July 2002
Take up of credit broadly in line with applications
Figure 24: Sources of finance used, by age/socio-economic group, July 2002
Credit less easy to obtain for non-mainstream borrowers
Figure 25: Sources of finance used, by type of borrower, July 2002
Figure 26: Differences in credit application/usage between mainstream and non-mainstream borrowers, by source of finance, July 2002
Mortgages and the sub-prime market
Around 1 in 10 mortgage applicants are sub-prime
Figure 27: Mortgage application experience, by age and socio-economic group combined, August 2002
People from low/no income pre-families and families most likely to be sub-prime mortgage applicants
Figure 28: Mortgage application experience, by lifestage, August 2002
Sub-prime borrowers most likely to apply at another bank or building society for a mortgage
Figure 29: Mortgage application channel preferences, prime and sub-prime borrowers,
Aug-02
Figure 30: Remortgage application channel preferences, sub-prime borrowers, August 2002
Future Influences and Conclusions
The economy a key influence going forward
Competition will continue to favour sub-prime borrowers
Consumers accepting debt as a fact of life
Regulation set to impact the sub-prime market
Final thoughts
Forecast
Favourable environment for expansion
Population forecasts are promising for providers
Figure 31: Sub-prime consumers, by socio-demographic segment, July 2002
Figure 32: The effect of future socio-demographic trends on potential target numbers for sub-prime lenders, 2002-06
Appendix: Research methodology
Index of reports
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