Consumer Credit: An Overview

Part A

INTRODUCTION

Consumer Credit; the ability for a customer to obtain goods or services through a loan or other financial accommodation extended by a bank, retailer or other organisation, serves around 39 million people in the UK [1], and is an important indicator of the health of the economy. According to the Bank of England, consumer credit grew 9.3% over the last year, [1] with 40,000 firms registered with the FCA. Between August 2016 to July 2018 lending to consumers grew steadily from 21.6 to 24.4 billion pounds[2].

THE CURRENT LANDSCAPE

Between 1993 until today – 2018 – consumer credit has averaged at around £935.41 million. Prior to 2008’s crash, lending reached an all-time high of £2228 million in January 2005. As one might imagine however, post crash, consumer credit was at rock bottom – just £-1188 million in the August of 2009[3].

Since 2013 UK consumer credit has grown quickly, at an annual rate of about 10% since the start of 2016[4].


source: tradingeconomics.com

This year (2018), consumer credit increased by £0.817 billion to £213.5 billion in July of 2018 – and below market expectations of a £1.5 billion rise. It followed a downwardly revised £1.521 billion gain in June[3].

 


source: tradingeconomics.com

In the years following the financial crash the growth in the credit market has been positive , and according to research conducted by the FCA, credit growth has not been driven by subprime borrowers. It’s those without mortgages who have been the drivers[5].

This boom is being met with caution from banks; an increasing proportion of credit card applications are being declined, and the demand for unsecured loans from consumers has also fallen sharply[6].

[6]+ Additional stats from BoE

 

Lenders are getting more cautious, perhaps as a consequence of the weaker consumer environment and slower economy, but perhaps also in response to the Financial Conduct Authority’s [FCA] concerns about credit card debt.

HSBC Analyst[7]

CONSUMER CREDIT REGULATION

Most types of consumer credit are regulated by the Consumer Credit Act 1974. In 2006 it was amended with the Consumer Credit Act 2006, which extended the scope of the original act to increase consumer protection when borrowing money. The act empowered the Office of Fair Trading (OFT) to regulate and manage consumer credit companies, as well as to introduce the use of the Financial Ombudsman Service to resolve disputes between consumers and the organisations from which they borrowed[8].

In 2014 the FCA took the reins from the OFT and began regulating consumer credit firms. The FCA’s remit is to ensure firms within the different consumer credit verticals, lend responsibly and treat customers fairly[9].

In those last four years there has been some significant changes for the industry, with more regulation predicted in the future. The most significant change has been to the High Cost Short Term Credit (HCSTC), which encompasses payday loans and credit brokers. The FCA introduced a price cap for HCSTC borrowing and banned credit brokers from charging fees to customers[10].

Other changes include moving towards helping customers repay their credit card debt more quickly, and reviewing unarranged overdrafts. The FCA has also brought about £18 million in compensation for 350,000 customers in the Rent to Own market as well as enforcing them to be more transparent about charges and improve their standards. They are also focusing on the vulnerable by improving the way debt management firms operate improving access to free advice[9].

In 2018 the FCA’s focus is on overdrafts, rent-to-own, home-collected credit and catalogue credit[11].

 

INDUSTRY ORGANISATIONS

Among the providers of consumer credit, there are several trade organisations which represent lenders.

Consumer Credit Association was founded in 1978 and represents the home credit industry. It is the acts as the voice for the sector and offers advice and help with legal compliance for Home Creditors of whatever business size[12].

Consumer Finance Association represents the short-term lending sector in the UK. It acts as a voice for the industry, conducts research on behalf of it, and works closely with the government[13].

For over 125 years the Consumer Credit Trade Association (CCTA) has been the representative of small to medium-sized consumer finance organisations and business. It offers its members legal advice, regulatory updates and training, among other services. Its aim is to reduce the cost and burden of new laws on industry and consumer[14].

FORMS OF CREDIT

Consumer credit products vary in their form and size and duration of loan or advance, and some are more popular or ‘mainstream’ than others. The table below details the popularity of the respective consumer credit products in terms of the number of consumers taking out each product annually.

Product Annual number of consumers taking out product (million)
Catalogue credit 1.9
Retail finance 2.3
Store card 0.4
HCSTC (high cost short term credit) [includes payday loans and short-term instalment loans] 0.8
Home Credit 0.7
Rent to Own 0.2
Other running account 0.2
Guarantor 0.1
Logbook <0.1

[15]

Within this list there is a subset of consumer credit which the FCA defines as ‘high cost short term ’ credit (HCSTC). HCSTC are short term unsecured loans – an example of a HCSTC product is a payday loan. HCSTC products require the borrower to repay, or substantially repay the loan back within 12 months. They have APRs of 100% or more[16].

In this overview we aim delve deeper into the forms of credit available to consumers, what those markets look like, and the typical borrower profile of said credit.

CATALOGUE CREDIT

Consumers are often given the option to purchase goods and spread the payment over weekly or monthly instalments. As the name suggests, goods are viewed and then purchased ‘on account’ through a catalogue while repayment periods are typically between three and 12 months[17].

Year Number of consumers taking out product (millions) Average (mean) value of credit limit at origination Number of originations (millions)
2012 2.8 £280 3.6
2013 2.7 £280 3.4
2014 2.0 £310 2.5
2015 1.8 £320 2.3
2016 1.9 £320 2.5

[15]

There has been a significant decline in the number of consumers taking out catalogue credit. At its peak 2.8 million people took out this form of credit, but in the following years it has reduced down to just 1.9 million in 2016, after a slight increase between 2015 and 2016[15].

Catalogue credit costs

Catalogue credit is not as expensive as some forms of credit. The table below shows catalogue credit compared to a credit card, based on a repayment of £250 over two years.

Type of credit Example APR Monthly Repayments Total payable amount
Credit card 19% £12.60 £302.0
Catalogue credit 30% £13.98 £335.52

[17]

Who takes out catalogue credit?

Out of the high-cost credit market, catalogue credit users are typically older, with a mean and median average age of 47 and 45 respectively, they also have on average higher credit scores than other high-cost credit products. Mean and median annual incomes are £22,300 and £17,700 respectively[15pg37].

 

RETAIL FINANCE

Retail finance is an arrangement between a retailer who may offer goods or services to a customer, and allow them, through an arrangement, to let them pay over instalments. Point-of-sale finance is growing service with new lending over £5 billion per year [18pg3]. Customers may wish to take out a finance agreement for higher value goods and bigger purchases like laptops or TVs.

These agreements are beneficial to the retailer as they can increase conversion rates. A 2015 survey compiled by retail finance provider, V12, found that 28% of customers spent more than they would have done without a finance option and 52% of customers wouldn’t have made their purchase without a finance option[19]. Unlike catalogue credit, retail finance is less affected by seasonal variations[15pg31].

Size of the retail finance market

YYear Number of consumers taking out product(millions) Average (mean) value of originations Number of originations (millions)
2012 1.8 £1,770 2.0
2013 1.8 £1,930 2.0
2014 1.9 £1,960 2.2
2015 2.1 £1,790 2.4
2016 2.3 £1,690 2.6

The number of consumers taking out retail finance grew between 2012 and 2016. The mean value and the number also grew between 2015 to 2016. There were on average 215,000 new agreements per month in 2016[15].

Who takes out retail finance?

Similar to catalogue credit, recipients are generally in their forties with mean ages of 42 and median ages of 41, they also have higher average annual incomes than catalogue credit borrowers at £31,900 (mean) and £24,700 (median)[15pg48].

 

STORE CARDS

Store cards work in a similar way to credit cards, but normally their use is restricted to one store. Customers are required to pay off either the full, or a portion of the balance at the end of the month. Interest accrues for balances which are not paid off in full.

One of the main benefits of store cards for consumers is that they frequently offer discounts and money off in their favourite shop.

Typical store card costs

Store cards have lower credit limits but generally higher interest rates than credit cards.

Type of credit APR %
Store card 25-30
Credit card 6-20

[20]

Size of the store card market

Year Number of consumers taking out product (millions) Average (mean) value of originations Number of originations (millions)
2012 0.5 £530 0.5
2013 0.5 £560 0.5
2014 0.4 £530 0.4
2015 0.4 £540 0.4
2016 0.4 £570 0.4

We can see from the table above that the number of consumers taking out store cards has remained reasonably consistent over the past four years – the average origination was up slightly in 2016[15pg53].

Store card offers and APR examples

Card APR% Offer
Oasis 28.9 15% off welcome treat; free delivery when shopping online
Topman 19.9 Free UK delivery on online orders four times a year (on spends of £50+); 10% extra off sale items in first week of sale; £5 voucher off £50+ spend in welcome pack; £20 voucher off £100+ spend in first statement.
Warehouse 29.9 20% off voucher when you first use the card; extra 15% off first week of sale.

[21]

Who takes out store cards?

Typically store card borrowers have a mean and median average age of 39 and 36 respectively, with estimated, respective, mean and median annual net individual incomes of £21,800 and £17,500[15pg57].

HOME CREDIT

One of the largest in the high cost credit market, home credit is used by more than 1.6 million people. Sometimes known as doorstep lending, home credit lenders provide personal loans in cash, and as the name suggests, bring it to your doorstep. These local lenders also collect repayments by visiting the borrower’s home on a weekly or fortnightly basis. Loans are usually for smaller amounts e.g. £100-1000[22] and are typically high interest[23]. Even though agents of lenders do not need personal FCA authorisation, the lender they represent needs to be registered with the FCA[24]. The Consumer Credit Association is one organisation which represents the home credit sector[12].

Home credit is associated with large seasonal variations in the number of loans being taken out, predictably around November and December.

Size of the home credit market

Year Number of consumers taking out product (millions) Average (mean) value of originations Number of originations (millions)
2012 0.9 £680 2.1
2013 0.8 £700 1.8
2014 0.7 £670 1.6
2015 0.6 £710 1.5
2016 0.7 £770 1.7

[15]

The cost of taking out home credit

APRs typically range from 62% to 1558%[22].

Credit type Amount borrowed Monthly payment Interest charged Total amount repaid
Home credit @ 272% APR £200 £30.30 / £7 per week £164 £364
Credit card @38% APR £200 £20 £37 £237

[23]

Who takes out home credit?

Home credit borrowers typically do not have as low credit scores as borrowers who take out ‘payday loans’, for instance[15pg80]. They are usually in their forties with mean and median average ages of 44 and 42 respectively. The FCA records some home credit borrowers as not having any income, but largely estimated mean and median annual, net individual incomes are just £17,500and £15,500 respectively[15].

To be continued…

In Part B we will look at different types of consumer credit including hire-purchase, guarantor loans, unarranged overdrafts, payday loans and credit cards. Stay tuned.


 

SOURCES [1] https://www.fca.org.uk/news/speeches/getting-affordability-right-consumer-credit [2] https://www.statista.com/statistics/311415/uk-lending-total-gross-consumer-lending-in-the-united-kingdom/ [3] https://tradingeconomics.com/united-kingdom/consumer-credit [4] https://www.ft.com/content/e81469c4-b8ab-11e7-8c12-5661783e5589 [5] https://www.fca.org.uk/insight/whos-driving-consumer-credit-growth [6] https://www.telegraph.co.uk/business/2018/01/11/banks-cut-back-consumer-credit-fear-rising-risks/ [7] https://www.theguardian.com/business/2018/apr/12/unsecured-consumer-lending-falls-fastest-rate-since-credit-crunch-bank-says [8] https://en.wikipedia.org/wiki/Consumer_Credit_Act_2006 [9] https://www.fca.org.uk/media/video-changes-made-consumer-credit [10] https://www.fca.org.uk/news/press-releases/new-rules-will-protect-consumers-harmful-fee-charging-credit-broking-practices [11]  https://www.fca.org.uk/news/speeches/high-cost-credit-what-next [12] http://www.ccauk.org/ [13] http://cfa-uk.co.uk/ [14] https://www.ccta.co.uk/ [15] https://www.fca.org.uk/publication/feedback/fs17-02-technical-annex.pdf [16] https://www.handbook.fca.org.uk/handbook/glossary/G3328.html [17] https://www.moneyadviceservice.org.uk/en/articles/catalogue-credit-or-shopping-accounts [18] http://www.credit-connect.co.uk/wp-content/uploads/2018/03/1262-Apex-Insight-Point-of-Sale-Finance-2018-summary.pdf [19] https://www.v12retailfinance.com/about-us/new-to-retail-finance [20] https://www.uswitch.com/credit-cards/guides/store-credit-cards-the-good-and-the-bad/ [21] https://www.moneysavingexpert.com/credit-cards/store-card-discounts/ [22] https://www.citizensadvice.org.uk/Global/CitizensAdvice/Debt%20and%20Money%20Publications/Home%20credit%20report.pdf [23] https://www.moneyadviceservice.org.uk/en/articles/home-credit-or-doorstep-lending [24] https://www.citizensadvice.org.uk/debt-and-money/borrowing-money/types-of-borrowing/loans/home-credit-doorstep-loans/