The lending market in the UK has benefited from lower lending rates after lowering the interest rate to a historic low. The base interest rate in the UK was cut by half in August last year to 0.25% in order to stimulate economic growth, and it remained at this level for the past eight months. This influenced the base interest rate for Great Britain, which fell to 1.25% from 1.55% in July and has remained unchanged at this level ever since.
This contributed to an increase in the debt burden among British consumers, as they seek to take advantage of low lending rates. The good thing about low lending rates in an improving economy is that you can borrow money cheaply and invest it in income assets as property for higher incomes. This concerns the UK, which, despite low interest rates, continues to enjoy incredible growth in the real estate market.
Nevertheless, interest rates on alternative lending markets remain high, especially in the category of high-risk customers, when borrowers can pay up to 100% and 50% APR for payday loans and guarantor loans.
A more in-depth look at the relationship between the credit market and economic growth in the UK shows that debt over the last five financial quarters is growing faster than GDP. Domestic debt of the United Kingdom in GDP in the IV quarter of 2016 was about 87.4 times, while in the second quarter of 2015 this figure was 85.4 times.
The same picture is depicted in the indicator “Household Debt to Income”. As of 2014, the ratio was 123.2, while a year later it jumped to 125.2. This illustrates the increased debt renewal by consumers in the UK, however, according to statistics, some of these people actually do not have savings.
Recent data show that more than 8 million people in the UK do not have savings, while a record 264 are declared insolvent or bankrupt each day as of November 2016. This figure does not include more than 300,000 people who are already too poor to be declared bankrupt because they can not afford a bankruptcy of £ 525.
Some of these people most often find themselves in such situations because of their involvement in the high-risk lending market. As noted earlier, high-risk lenders can charge interest rates up to 100% on payday loans. And for borrowers who manage to find a guarantor, they can charge an interest rate of up to 49% APR. Guarantor Credits provide lenders with some level of pillow if the borrower defaults at a high risk. Currently, they are among the most popular high-risk vehicles in the UK, where there are several online platforms providing access.
The increase in consumer credit also indicates that there are many people who do not borrow funds for investment. As shown in the table below, the level of consumer lending has been growing since 2014, and this trend seems to continue in the foreseeable future.
While the monthly data was quite volatile, the general trend points to linear growth with a small dip earlier this year (again, this may be due to monthly volatility).
Now, when people expect that in the future the economy will improve, borrowing becomes an attractive financial activity in the market. However, when they borrow for the wrong reasons, the benefits associated with borrowing with a low interest rate disappear. That’s why some people are looking for opportunities for lending in the high-risk lending market, where their risk profiles are smaller.
Statistics show that most people who borrow in the markets of payday loans and guarantor loans have bad credit. Thus, the rapid growth that this market has experienced over the past few years can be explained by the increase in the number of people with bad credit.
And with more than 8 million people in the UK having no savings, this explains why the level of consumer credit has been rising. The question is whether or not consumers in the UK will take too much debt that could reduce the economic growth that has been observed over the past five years.