Car loans drive surge in UK consumer borrowing

http://www.theguardian.com/money/2016/jan/15/car-loans-uk-consumer-borrowing-bank-of-england

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A surge in loans for new cars was behind a big increase in lending to households, according to Bank of England figures, which may raise fresh fears that families are falling into the trap of debt-fuelled spending.

The Bank, in its quarterly credit conditions survey, said unsecured borrowing by households – such as personal loans and credit cards, but not mortgages – jumped by 8.3% in November.

Individuals are also finding it easy to obtain loans, the Bank said, as lenders have loosened their credit scores to allow more people to borrow.

Car sales are an all-time high in Britain, largely on the back of low-interest finance deals. A total of 2.63m new cars hit the roads in 2015, an increase of 6.3% on 2014 and above the previous record of 2.58m, set in 2003.

The data has prompted fears that British households are racking up unsustainable amounts of debt, with growth in consumer borrowing returning to levels last seen before the financial crisis.

But earlier this week, Bank Mark Carney played down talk of an unsustainable credit boom. He said “this is not a debt-fuelled recovery”, pointing out that private sector debt has fallen to around 130%-140% of GDP over recent years, from more than 200% in 2008.

The credit conditions survey suggests that the lending spree by banks is because even though interest rates are low, the profit margins on loans are high.

The Bank said that “spreads” on unsecured lending “widened significantly” in the last three months of 2015. The number of customers defaulting or failing to repay loans in full has also fallen significantly, further boosting lenders’ profits.

Growth in mortgage lending is running at a more subdued pace, the Bank added, with most of the increase attributable to lending to buy-to-let landlords.

In December, the Bank put lenders on notice that it was concerned about the expansion of buy to let, which may make banks vulnerable in a property market downturn.

“Demand for buy-to-let lending increased significantly in Q4, while demand for prime lending fell slightly,” said the Bank. But it added that following a raft of tax changes, buy to let is likely to lose steam during 2016.

“In recent discussions, most major UK lenders noted that growth in BTL house purchase activity could slow in 2016. Lenders also commented that some BTL activity could be brought forward to 2016 Q1, before the changes announced in the 2015 autumn statement take effect.”

Lending to corporate Britain was up in recent months, according to the Bank, with annual growth reaching 2.1% in November, but big companies are finding it easier to access finance than small companies. “While the improvement in credit conditions has been apparent across all business sizes, smaller SMEs appear to have experienced a more gradual improvement than larger companies.”