Growth Rate - UK Personal Loans Market
Using official data published by the Bank of England, we have estimated the growth rate of the UK Personal Loans market within the next three years to be 3.95%. The growth rate is expected to slow down over the next three years, mostly because of Brexit uncertainty and because of hints that the central bank will continue to increase interest rates. No data exists on the split into prime customers and near-prime customers, but we were able to identify some general information on the credit rating system in the UK. Please find our calculations and helpful findings below.
Definition of personal loans in the UK
- The Bank of England (BoE) defines consumer credit as "borrowing by UK individuals to finance current expenditure on goods and/or services excluding loans issued by the Student Loans Company."
- The BoE splits consumer credit into two components: "credit card lending and ‘other’ lending (mainly overdrafts and other loans/advances)."
- The UK's Money Advice Service explains that personal loans are also called "unsecured loans" in the UK. They are called unsecured because the loans are not secured against any asset.
- From the above definitions, it can be inferred that personal loans in the UK are those loans that are not secured against an asset and that are not student loans. Since another brief is covering the growth rate of credit card lending, the focus of this response is on "other" lending, as defined by the BoE.
Growth rate data
- The annual growth rate of consumer credit (which includes personal loans and credit card lending) peaked at 10.9% in November 2016 and it has been declining steadily ever since.
- BoE statistics from August 2017 provide an estimated growth rate of 7% for the personal loans market.
- In February 2019, the annual growth rate of consumer credit was at 6.3%.
- The annual growth rate of personal loans, specifically, was at 6.2% in February 2019.
Growth rate estimation
- The annual growth of consumer loans in the UK has been slowing steadily from November 2016, but the slowdown in 2019 has been more gradual than in 2018.
- Demand for lending naturally decreases as interest rates in a country increase, because the cost of lending gets higher. The BoE has hinted at an increased pace of interest rate rises in November 2018. Therefore, it is reasonable to expect that the annual growth rate of consumer loans will continue to decrease over the next three to five years.
- The BoE dataset allows us to estimate how much the annual growth rate will change over the next three to five years, by looking at recent history. The growth rate in February 2016 was at 11.2%, in February 2017 it was at 11.1%, in February 2018 it was at 9.3% and in February 2019 it was at 6.2%.
- The average change of the growth rate over the past four years can be calculated in the following way: first, the change over two consecutive periods needs to be calculated, then the changes need to be summed up and divided by 3 (number of changes) to get the average rate of change.
- 11.2-11.1=0.1; 11.1-9.3=1.8; 9.3-6.2=3.1; (0.1+1.8+3.1)/3=5/3=1.67
- Since the above calculations are performed using absolute values, it should be noted that the actual yearly change is -1.67.
- The BoE expects the slowdown to decrease in speed, by about 18% annually.
- So we can estimate that the yearly change of the growth rate from 2019 to 2020 will be -1.67, from 2020 to 2021 it will be -1.37 (-1.67*0.82=1.37) and from 2021 to 2022 it will be -1.23 (-1.23*0.82=-1.23).
- By applying the calculated change to the annual growth rate of the UK Personal Loans market, we can get the growth rate for 2020. By applying the calculated change to the 2020 growth rate, we get the growth rate for 2021 and so on.
- 6.2-1.67=4.53% (2020); 4.53-1.37=3.16% (2021); 3.16-1.23=1.93% (2022).
- Finally, the growth rate of the UK Personal Loans market within the next three years is calculated by finding the average of the above growth rates. (6.2%+4.53%+3.16%+1.93%)/4=3.95%
- Therefore, the growth rate of the UK Personal Loans market within the next three years is estimated to be 3.95%.
Prime and near-prime customers
- Prime customers in the UK are considered to be those customers with an "excellent" credit score. UK citizens do not have a single, definitive credit score. Instead, three Credit Reference Agencies exist and each uses a different scale.
- Experian classifies individuals with a credit score between 961 and 1000 in the excellent category. Equifax classifies individuals with a credit score between 466 and 700 in the excellent category. TransUnion classifies individuals with a credit score between 628 and 710 in the excellent category.
- The research agency Mintel provided an estimate of the growth rate of the UK Personal Loans market until 2023, but the report exists behind a paywall so it is not accessible.
In order to identify the growth rate split into prime and near-prime customers, we first consulted financial news outlets and the general press. We have searched through sources like the Financial Times, The Motley Fool, UK Finance, Reuters, Guardian and others. While we were able to identify some information about unsecured credit in the UK, we were unable to find what percentage of UK borrowers have a prime credit rating. We did, however, find how prime customers are defined in the UK.
Then, we proceeded to look at government resources like HM Treasury, the Financial Conduct Authority and the Bank of England. While the government resources provided a wealth of information on the growth rates for lending in general and for personal loans specifically, none of the sources mentioned prime credit ratings at all, let alone the split of growth rates into prime and near-prime customers.
Finally, we tried to calculate the split of the growth rate ourselves. To do this, we tried to find how many UK borrowers fall into the "excellent" credit rating category. However, no statistics on the number of prime customers in the UK exist in the public domain. The most likely reason for the lack of data lies in the fact that UK citizens do not have a single, definitive credit score. The three rating agencies that operate in the UK use different scales, so a certain citizen's credit score can be rated as "excellent" by one agency and just "good" by another.