An expanding economy fuelled by continually low-interest rates is increasing demand for credit in the UK, according to data from 2015. Not only has consumer credit strengthened in the last year, but it also looks to continue its upward trend through the end of the decade. Unsecured personal loans will be among the strongest performers, potentially reaching as high as £50 billion by 2020.
There are three key factors encouraging consumers to seek out more unsecured lending than they have in the past:
A report released by Mintel in January 2016 suggests the unsecured personal loan market grew by some 12% in 2015, reaching roughly £35 billion. Mintel expects growth to continue, although perhaps at a slower rate than that which was observed in 2015. The two biggest concerns right now are the potential of a base rate increase in early 2017 and the emergence of challenger banks that see unsecured lending as an area with a lot of potential.
The emergence of peer-to-peer lending is a double-edged sword as it applies to unsecured loans. From the consumer standpoint, peer-to-peer lending makes it possible to borrow significant amounts of money at rates that are generally more reasonable than what banks are offering. Terms also tend to be more favourable to consumers. Borrowers are turning to peer-to-peer platforms in greater numbers.
The banks see peer-to-peer lending in a different light. They are turning to these emerging platforms to raise cash they can then lend to consumers at the retail level. As Mintel puts it, this paradigm shift is turning "lenders into borrowers".
Although payday loans continue to be seen in an unfavourable light by the majority of consumers, those who use them no longer see them as a last resort financial product. Data shows that regular payday borrowers use the loans far more frequently than they used to and for a larger variety of purposes.
These new attitudes toward payday loans have caused the segment to grow steadily over the last 18 months. In turn, the growth of the segment has pushed overall unsecured lending up, contributing somewhat to 2015's 12% growth. Indications are that payday loans will be a significant player in any growth observed for 2016.
Unsecured personal lending has always relied on very strict credit check criteria for the obvious protection of lenders. This is now changing thanks to new credit check standards that are making unsecured loans and credit cards more attractive to consumers.
As the economy improves and lenders have more money to lend, they are making it easier for consumers to borrow. New security measures are easing consumer fears about security in the credit check arena, and restrictions on borrowing are being loosened in order to further stimulate the economy with more economic activity. The combination of both is easing the unsecured lending market for consumers who were shut out in previous years.
Current market conditions suggest unsecured lending will continue its upward trend in 2016. Whether or not predictions of slower growth compared to 2015 come to fruition remains to be seen. This early in the year it could go either way. For 2016, there is also a dark horse that needs to be considered when trying to project growth: the EU referendum set to take place in June. That vote will undoubtedly affect markets regardless of how it turns out. Analysts will be watching closely.
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