Unsecured borrowing in the UK increased by £23bn in 2016 - equivalent to £62m a day - with total household debt now swollen to almost £270bn, according to PwC’s UK Consumer Credit Outlook report.
This form of borrowing in the UK is now at an all-time high, with (among other types of borrowing) credit card, overdraft and personal loan debt standing at the equivalent of close to £10,000 for every household in the country.
PwC expects unsecured borrowing to continue its rise, however affordability will come under pressure in the coming years, with debt as a proportion of household disposable income, set to reach around 165% by 2020, a high last seen in the run-up to the financial crisis.
Despite the relatively high levels of borrowing, UK households’ credit confidence2 is at its highest level since PwC’s Credit Confidence Survey began in 2009. Continued low interest rates, record levels of employment and above-inflation earnings growth have combined to underpin these relatively high levels of confidence.
The report shows that student debt continues to be a significant driver, accounting for half of the overall £23bn increase in unsecured debt seen between 2015 and 2016. However, other types of unsecured lending have played a significant part, with both credit card lending and car financing having an impact.
A separate PwC survey of 1660 people3 suggests that the credit confidence of British consumers has not been adversely affected by the result of the referendum on European Union membership. Only 20% of respondents said it will be harder to secure credit for future purchases while 17% believed it will be harder to make repayments in the future. It did, however, reveal that confidence has suffered in certain groups.
Those aged between 18 - 24 (32%) -many of whom are facing the prospect of missing out on a place on the property ladder- agreed with respondents aged 25-49 (33%) that they felt more cautious about their borrowing after the EU referendum and the potential impact of Brexit on their finances.
However those in the 50+ bracket were far more bullish about the future, and were unfazed by the vote to leave the European Union, with only 26% of the segment claiming they feel worried about the impact Brexit might have on their finances.
Simon Westcott, financial services director at PwC, said:
“The UK’s unsecured borrowing has reached uncharted levels. Rising 9% in 2016, or £62m per day, unsecured debt has now eclipsed pre-crisis levels to reach an all-time high of £270bn this year. This is the equivalent of every household in the country owing nearly £10,000.
“While PwC’s annual Credit Confidence Survey revealed the highest levels of credit confidence since the survey began, we are seeing a disconnect between business and consumer confidence. Despite the shockwaves rebounding across Europe and the currency issues which have hit Sterling, consumers are still surprisingly chipper.
“The rapid increase in unsecured borrowing over the past three years reflects a change of attitude on the part of UK households. Following the financial crisis, we saw households repaying their debt, reducing unsecured debt by around 10% between 2008 and 2012 - or closer to 25% if we exclude student borrowing. Since that period, despite the recent uncertainty created by the EU referendum, a number of macro-economic factors combined to create a climate of rising consumer confidence and borrowing.
“We are likely to see continued growth in unsecured borrowing over the next two years, albeit at a slower rate in 2017 and 2018. However, there are significant risks to the downside. These include the risk of real wage growth slowing or going into reverse, due to the risk of imported inflation linked to a weak pound and uncertainties regarding the implications of Brexit.”
PwC’s analysis went on to find that credit card bad debt as a percentage of outstanding balances had fallen significantly from their peak of 9.5% following the financial crisis, with PwC projecting write offs to be around 2.5% in 2016 , a low last seen in the late 1990s. A similar fall in bad debt levels has also been seen on other types of unsecured borrowing.
However PwC’s analysis shows there are between 10m - 14m people in stuck in ‘near-prime’ credit limbo. Despite having only relatively minor blemishes on their credit history, or only having a limited credit history, this large group of people still find it difficult to obtain credit from mainstream sources.
Isabelle Jenkins, UK banking and capital markets leader at PwC, said:
“Unsecured borrowing in the UK remains dominated by traditional lending products. Excluding student loans, credit cards make up around 60% of the total unsecured credit market, with personal loans, car finance and overdrafts contributing the majority of further outstanding debt.
“However, it has taken banks almost ten years to recover the total value of lending that they provided to consumers in 2006, with non-bank lenders having stepped in to fill the gap.
“New competitors can – and do – challenge the status quo, but they also have to prove their business model is sustainable and adaptable.”
After years of promise, mobile payments are finally beginning to gain traction. This foundation for growth has been laid by the introduction of Apple and Android Pay in July 2015 and May 2016 respectively.
The merchant acceptance challenges of the past have been largely overcome and, while data from the UK remains relatively sparse, parallels can be drawn from the US, where adoption rates of Apple Pay among eligible users have almost doubled in the past year.
Simon Westcott, financial services director at PwC, added:
“As the FinTech juggernaut rolls on, we expect mobile payment adoption rates in the UK to increase significantly as mobile payments become accepted by ever more merchants and consumer nervousness regarding the security of mobile payments recedes.
“A future where digital wallets take over entirely from plastic cards may not be too far away.”
PwC press release