Consumer Credit: An Overview – Part B

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CONTINUED…

In Part A of our series we looked at the consumer credit market as a whole, in addition to catalogue credit, retail finance, store cards and home credit.

RENT TO OWN

Often if a customer wishes to purchase new home items, such as white goods, furniture, televisions or sofas, and they are unable to make the total payment in one go, they can enter into a credit agreement (otherwise known as hire purchase agreement) with a rent-to-own retailer which involves them paying a stipulated amount each week[1].

This allows them to take home the goods straight away, but they do not own the goods until the final payment has been made [2pg86].

Rent-to-own agreements offer convenience for its customers they can take the goods home relatively instantly, and they can choose what they want from a brick-and-mortar store. Retailers such as Brighthouse and Perfect Home are examples of those that have shop fronts. In June 2018 Perfect Home had 18 operating high street locations. [3]

The FCA began regulating the rent-to-own sector in 2014 when it took over regulation of consumer credit. Significant changes to the sector have been made since then, with retailers now obliged to displaying the cash value of goods, the amount of interest to be paid, and the total cost to customers [4]. The FCA plan to introduce further changes to the sector in April 2019[5].

Size of rent to own market

Towards and over the Christmas period, data from the last few years shows that a fifth of annual lending occurred in November and December. Between 2013-2015 was the peak at when people took out one or more rent-to-own agreement – around 250,000 per year. 2016 saw a fall in this number, dropping to 200,000. [2pg86]

Year Number of consumers
taking out product
(millions)
Average (mean) value of originations Number of originations (millions)
2013 0.2 £1,120 0.8
2014 0.2 £1,190 0.8
2015 0.2 £1,130 0.7
2016 0.2 £1,090 0.6

[2pg87]

The cost of rent to own

Different retailers have different representative APRs as shown in the table below.

Company Representative APR
Brighthouse [1] 99.9%
Perfect Home [6] 69.8%
Fair for You [7] 51.1%

Representative APRs as of November 2018

It goes without saying that different goods will cost different amounts. Here are some examples of what a 4’6” bed would cost from the below retailers.

Product: 4’6” double bed:
Brighthouse [8] Perfect Home[9]Figures correct at date of publication
Cash Price £60.00 FREE
Number of weeks payment 156 156
Weekly payment 69.9% 69.8%
Total Payable £1,248.00 £1,090

Examples as of 10/10/18. N.B. these products are not identical

Who takes out a rent-to-own agreement?

The mean and median average age of 39 and 36 respectively of those who take out rent to own agreements is typically younger than home credit users [2pg92] who are usually in their forties [2pg80]. They are not usually homeowners as only 1 in 30 have mortgages [2pg94].

GUARANTOR LOANS

Guarantor loans are personal loans, although it is a credit agreement with a difference; if the borrower cannot make payment, then the responsibility of the loan falls to the guarantor – another individual – often a relative who promises to pay back the amount [10]. Guarantor loans allow people to borrow up to £15,000 [11].

Size of the guarantor loan market

The guarantor loan market has seen success in a number of other countries but had not until recently been all that established in the UK.[2pg97] As they have become more of a mainstream product, smaller operators have become more professional , stabilizing the sector. [12]. In 2016, guarantor loans reached their highest ever value at £380 million from 100,000 loans [2pg98]. Almost three times as many people took out a guarantor loan in 2016 than did 2012 [1pg97].

Year Number of consumers
taking out product
(millions)
Average (mean) value of originations
Number of originations (millions)
Value of originations
(billions)
2012 0.03 £3,250 0.03 £.010
2013 0.04 £3,260 0.04 £0.14
2014 0.04 £3,430 0.05 £0.16
2015 0.05 £3,570 0.06 £0.20
2016 0.08 £3,940 0.01 £0.38

The cost of a guarantor loan

The table below shows the cost of a guarantor loan of £3,000 for a loan term of 36 months. These figures were correct on date of research (05/12/18), and may have altered now.

Lender Per month
Total Repayable
APR (representative)
Amigo Loans £146.39 £5,270.04 49.9%
UK Credit £134.10 £4,827.60 39.9%
1 Plus 1 Loans £143.83 £5,177.88 47.8%

Who takes out a guarantor loan

The mean average age is 35 while the median average age is 33. The respective mean and median annual individual income is £26,100 and £20,800 respectively [2pg103]. They typically have low credit scores [2pg103].

PAYDAY AND SHORT TERM LOANS

Payday loans are designed for people to borrow loan of around between £100-£10000 [14], and then repay the loan amount at the end of the month (when they get their paycheck) plus the interest. Payday lenders may also offer short-term loans which can be borrowed over longer periods, with repayments in set, agreed installments [15].

The FCA began regulating payday loans along with other consumer credit products in 2014. Regulation brought in new rules which encompassed affordability, advertising, rollovers and use of continuous payment authorities (according to the FCA, CPAs are where consent is given by a customer for a firm to make one or more requests to a payment service provider for one or more payments from the customer’s payment account [16]).

In January 2015 the FCA introduced a price cap which meant someone taking out a loan on or after the second of January, would never be allowed to pay back more than twice what they borrowed; or and the interest and fees charges must not exceed 0.8% per day of the amount borrowed.

In April 2017, the CMA required all payday loan lenders to advertise on at least one price comparison website, for example Choose Wisely, All The Lenders, Clear and Fair. [17a]


[17]

This new regulation saw the industry shrink somewhat. In 2011/12 the industry was valued at £2.2 billion with around 240 lenders operating in the market[18]. By 2016, it reduced to £1.1 billion [19].

Greater regulation has forced what were ‘traditional’ payday loan lenders to change their business models to include longer term installment products [20pg18]- which is why short term loans are also included within these section.

Size of short term / payday loan market

Year Number of consumers
taking out product
(millions)
Average (mean) value of originations
Number of originations (millions)
Value of originations
(billions)
2013 1.7 £240 10.3 £2.5
2014 1.2 £240 5.3 £1.3
2015 0.7 £260 3.3 £0.8
2016 0.8 £290 3.6 £1.1

[2pg63]

Who takes out short-term loans?

Typically the average mean and median age of these borrowers is 35 and 32 years old respectively, with mean and median annual incomes of £23,600 and £22,000[2pg68]. Finder.com states that recipient of this kind of credit are renters and usually unmarried [21]. On the whole payday loans customers use the internet to apply for a loan – a total of 83% of them [20pg6].

OVERDRAFTS

Overdrafts are a facility which allow bank customers to go into deficit should the account have more money withdrawn than it holds. The bank effectively provides account users with a loan to cover the deficit. Overdrafts are primarily used to cover emergencies, unplanned, or infrequent shortfalls [22pg8]. There are two types of overdraft – authorised and unauthorised and both usually incur fees and sometimes interest, especially those of the unauthorised variety. There are 7.3 million people who use both types each year [23pg11].

A report by the FCA on overdrafts in March 2018 found that overdrafts don’t have the same debt connotations as other forms of consumer credit [22pg9]. Free basic bank accounts don’t automatically come with an overdraft facility [24], but they are often packaged up with popular, standard bank accounts with a lack of a separate application process [22pg7].

At the moment the FCA does not require banks to provide APRs for overdrafts and so they are often difficult to compare against other products of consumer credit [23pg43 4.33]. In 2017 the Guardian reported that overdrafts from certain banks had been at APRs of 52% [25]. Representative interest rates on overdrafts normally use EAR (Equivalent Annual Rate) rather than APR as it takes into account compound interest [26]

Authorised Overdrafts

These are also called arranged overdrafts, and as it says on the tin, these are where there is a pre-agreed deficit amount which is covered by the bank. Both authorised and unauthorised overdrafts earn money for the banks with 30% of the total revenue from this service is generated from unauthorised overdrafts[27]. Most banks charge fees for overdrafts of both varieties, but there are some accounts which offer “interest free” overdrafts, although there are certain fulfillments which need to be met by the account holder such as minimum monthly pay in, or a monthly account fee in order to receive such an offer. [28].

In the UK there are 19 million people who use an arranged overdraft each year, and on average spend seven days of the month in that overdraft. Usually overdraft values are below £250 and on average consumers use arranged overdrafts eight out of 12 months. [23pg11]

Unarranged

Unarranged overdrafts are the opposite – the deficit amount that the bank covers for the customer which has not been agreed in advance. It may be that the customer has an arranged overdraft but exceeds the agreed amount – that would then become an unauthorised amount.

There are 13 million people in the UK who use an unarranged overdraft each year, with five days being the typical time period spent in this situation. The majority of unarranged borrowing is considerably less than that of arranged overdrafts – just £60. [23pg11]

Banks can charge fixed fees for unarranged overdrafts in addition to interest on the amount that the user is overdrawn by. The FCA found that the interest paid by unarranged overdrafts users between 2015-2016 charged the equivalent of over 10% interest per day. 15% of those were paying over 20% interest per day. [23pg10]. According to The Money Advice Service, monthly fees can vary between £5 to £35, or more, while daily fees range £1 to £6 a day or more (up to a set limit per month).[24]

The size of overdraft market

The chart below shows the decline in growth of personal loans and overdrafts by high street banks between March 2017 and March 2018 which echoes the downward trend of caution within the consumer credit market [29]. Growth decreased by 4.4% between March 20178 and March 2018, even though there had appeared to be a temporary cessation in the decline in July 2017 at 6.2%.

Annual growth rates of personal loans and overdrafts by high street banks in the United Kingdom (UK) from March 2017 to March 2018

[30]

The cost of an overdraft

Bank Account
Tariff for agreed overdrafts
Costs £500 x 7 days
Equivalent interest rate
(billions)
Natwest/RBS Select £6 monthly fee + 19.89% EAR £7.75 81%
TSB Classic £6 monthly fee +19.85% EAR (first £25 free) £7.67 80%
Santander 123 £1 per day up to £2,000 £7.00 73%
Barclays Bank account 75p per day up to £1000 £5.25 55%
Lloyds Bank Classic £1p per £7 borrowed per day £4.97 52%
Halifax Reward £1p per £7 borrowed per day £4.97 52%
Metro Bank Current 15% EAR £1.34 15%
Starling Bank Current 15% EAR £1.34 15%
Post Office Standard Account 14.6% EAR £1.32 14.6%
M&S Bank Current 15.9% (first £100 free) £1.14 15.9%
First Direct 1st account 15.9% (First £250 free) £0.71 15.9%

[31] Research and calculations 31.05.2018

Who uses overdrafts?

Authorised Overdraft: Median Age Unauthorised Overdraft: Median Age
42 37

[23pg11]

CREDIT CARDS

Credit cards are an extremely popular consumer credit facility. Either issued by banks or another financial institution, credit cards give approved users a line of credit – or the ability to borrow – a set amount of money usually each month which the credit user then pays back either in full or in part. Interest is added to the balance of the unpaid loan but there can be an interest free period of up to 59 days[32]. Banks use card networks such as Mastercard and Visa to process the transactions.

As well as the fact that payment is deferred until later, credit card users frequently receive added bonuses such as air miles, cash back or other benefits.[33]

Section 75 of the Consumer Credit Act provides users of credit cards with additional rights and protection. It essentially means that the credit card provider is jointly liable for any breach of contract or misrepresentation by the retailer or trader. [33]

The list below showcases the types of credit card which are available to customers. [32]

1. Cashback and rewards cards
2. 0% purchase cards
3. 0% balance transfer cards
4. Balance transfer and purchase cards
5. Overseas spending credit cards

Size of credit card market

Cards are one of the most popular forms of payment method with 19 billion card transactions in total (this figure includes debit too) [34pg7].

According to statistics collated at the end of 2016, there were 64 million credit and charge cards in circulation in the UK [34pg6], with every six in ten people owning one[34pg7]. Credit card spending in 2016 was £179 billion while the average purchase via credit card was £53.55 [35]

The chart below shows just how these numbers have fluctuated between 2012 and 2017.

Total number of cards with a credit function issued in the United Kingdom (UK) from 2012 to 2017 (in millions)


Source: Statista

[source]Statisa.com

Projected figures suggest that credit card payments will reach 3.7 billion worth £189 billion in 2026 compared to 2.7 billion payments worth £154 billion in 2016 [34pg13].

How much do credit cards cost?

The chart below shows how the average interest rates on credit cards has fluctuated between 1993-2017 [35] – from a range of 17.97% in February 1999, dropping to its lowest point in the period in July 2003 13.49%, rising again steadily until the end of the measured period to 18.5% in February 2018.

Embed:

Spending on credit cards has been on the increase since 1993. The chart below shows the monthly credit card spending trends from that time until 2018 [35]. November 2017 saw the biggest month on record with £17.3 billion spent which is over five times the amount spent in the lowest on record, May 1993, £2.73 billion.

Lending and repayments on credit cards have mirrored each other until the end of 2012, when despite the decrease repayments, lending continued to rise. There remains a significant disparity up until the end of the measured period. In February 2018 lending was at £16.63 billion while repayments were at £12.59 billion. The figures have been seasonally adjusted. [35]

According to Money Advice Service around 60% of people who have credit cards pay off the total balance each month [36].

Examples of credit card costs:

If the consumer had a £1,000 balance, are charged 18% interest and were not adding any further to that balance by using the card, this is what various monthly credit card repayments would look like.

Monthly Repayment Total Interest Total Cost Time Taken to clear balance
£30 £353 £1,353 3y 10 months
£100 £85 £1,085 11 months

[36]
Obviously if the consumer had a 0% purchase credit card, and was able to pay back the balance at the end of the allotted interest free period, then the above charges in the table would not apply. [37]

Who has a credit card?

Around 80% of those in higher income brackets (over £50,000) have a credit card compared to 20% of those in the lowest income brackets (below £10,000). [34pg7]

The profile of someone with a credit card differs according to the type of card they have. The charts below showcase card use among homeowners and non-homeowners.

Data [38]The number of consumers searching for credit builder cards, low rate cards and purchase cards, and the percentage of those consumers that are homeowners and non-homeowners – according to MoneySuperMarket data correct as of July 2018.

CONCLUSION

In Part A of our comprehensive consumer credit overview we looked at the current landscape of consumer credit market before taking a more in-depth review of the individual products and their regulation, the respective market sizes of each and the customer profiles of which they serve. In Part A this included catalogue finance, retail finance, store cards and home credit. In this piece, Part B, we have continued to look at other forms of consumer finance. From our overview we can see that consumer credit is required and accessed by a variety of different consumer profiles – be that age, credit score and, or income – among other variables. Our review also showcases the differing costs of credit products and how they are charged to consumers. In conclusion we believe the role of the FCA is vital in governing and balancing all forms of credit so that consumers get a fair choice and the best deal, and we at Wizzcash continue to support them in that role.