Keeping up to date with the latest data on credit conditions is something which most financial organisations do – including Wescot, a credit services company, whom you can read more about here. Whilst finance experts like Wescot are well aware of developments in the credit arena, most consumers remain uninformed about such matters. This can often lead to confusion when they apply for loans or credit cards, and find that their applications have been turned down. But, as Experian’s Q3 2014 report revealed, many factors contribute to lending decisions, and these factors vary from one quarter to the next. Let’s take a closer look at this document now.
The report showed that whilst unsecured credit continued on its upward path, there was – for the first time in eight consecutive quarters – a weakening in secured lending to households. The information regarding the latter was taken from the quarterly CCS (Credit Conditions Survey) from the Bank of England, who conducted their survey between August 13th and September 8th of 2014.
The results of the Bank of England’s research were based on the responses made by lenders, and were calculated by assigning each lender a score, based on their selected response. The lenders who stated that conditions had changed slightly were given half the score of those who stated that conditions had changed significantly. The scores were then weighted, according to the market shares of each lender.
The availability of unsecured credit rose once again during this period of time, as did the demand for credit card loans. However, there was no notable increase in the demand for other forms of unsecured loans. The report predicted that both unsecured and secured lending to consumers would rise during the subsequent quarter, and that this trend would continue on into the following year.
In its report, Experian noted that the CCS showed a drop in the demand for mortgages; it has been said that this reduction was the result of the public taking a less favourable view of high-risk financial decisions. This drop in mortgage applications also coincided with a decline in the availability of mortgage credit; this was due in large part to the implementation of the MMR (Mortgage Market Review), which led to a number of operational issues for several lenders. In the survey, some lending firms also noted that their expectations regarding property prices were also a factor which had contributed to the reduction in availability.
A number of lenders added that they had chosen to restrict availability due to the FPC’s (Financial Policy Committee) recommendations that lenders should attempt to lessen the risks associated with the property market. They also stated that they were less eager to lend at LTV (loan to value) ratios of over 90%, and that the credit scoring criteria for mortgage applicants had become slightly stricter during this quarter. Lastly, many lenders said that they expected secured net lending to increase by 1.7% during the final quarter of the year, and by 2.2% in 2015.
The report indicated that lenders had a positive outlook for the final quarter, due to the fact that the third quarter saw the economy doing well, unemployment rates falling, and consumer confidence remaining high. However, their outlook for credit conditions beyond the next few months were slightly more pessimistic, with some citing political and economic uncertainty as reasons for a possible drop in the demand for credit in 2015. Although, as mentioned earlier, the economy has been strong, its growth is beginning to slow. Another issue which could result in consumers taking out fewer loans, is the lack of wage growth; this particular issue typically leads to little or no improvements in productivity, and could potentially pose a threat to the economy in the future.
There was an overall increase of £3 billion on unsecured lending between the months of July and September; this is a considerable amount, particularly when compared with the average of £2.3 billion over the previous two quarters. The annual growth rate for unsecured lending rose to 6.1%, a figure which hasn’t been seen in more than 8 years; however, this percentage still pales in comparison to the rates of 2005, which stood in the double digits.
Credit card lending was also shown to have risen, with its annual growth rate coming in at 4.7%, due to a £0.6 billion increase. According to the CCS, this rise in demand for credit card loans was the result of improvements in the economy, and the marketing campaigns implemented by lenders.
There were no changes seen in spreads on credit cards for the third quarter. The credit scoring criteria for consumers applying for unsecured loans also became slightly more lax, and default rates were the same as those reported in previous quarters. Credit card interest rates rose somewhat, although the increase was not significant, when compared with the second quarter, and the rates were in fact lower than those from the same period in 2013. Much like in the previous 12 months, personal loan interest rates remained unchanged.
Experian’s report explained that the CCS expected an expansion in overall net lending during the last three months of 2014, with the demand for both credit cards and other types of unsecured lending services likely to rise quite a bit; however, it also forecasted a rise in the rate of defaults on credit cards during the final quarter. The criteria used to score lending applications was expected to become quite lenient.