How consumer borrowing has changed in 2021

• Alex Hartley
• 27th July, 2021
• News

To limit the spread of covid-19 the UK government announced the first national lockdown on 23 March 2020. People had to stay at home unless they were essential service providers. In a period when there were no vaccines, this was the only option available. The effect of these measures was to severely limit people’s ability to spend. Only physical shopping for essentials was permitted and while online sales increased significantly the overall amount spent fell. Consequently, credit card spending declined markedly reaching a 27-year low in February 2021 according to a report by the Bank of England. Lenders also pulled in their horns not wishing to expose themselves to undue risk should unemployment start to increase. Since March 2020, the consumer credit trend has been characterised by more repayments than borrowings.

Rebound in Spending and Demand for Consumer Credit

Since the 17 May 2021 relaxation of restrictions, consumers have gone out and spent. During the pandemic, many people had strengthened their balance sheets, piling significant cash in savings accounts and other deposit accounts. It is worth pointing out though that this is by no means true of all sectors of society. Some have become worse off following lower incomes and some unemployment (if furlough was not an option).

Following a successful vaccine deployment programme and a slowdown in infection rates and hospitalisations, people have been allowed to travel (within strict guidelines) and enjoy outdoor entertainment. Thanks to the thrill of the regained freedom, consumer spending on things like drinking, dining, leisure, and travel, has spiked. Economists call it ‘revenge spending’ and it gives a hint that the worst of the pandemic could be over.

For instance, looking at travel, some popular destinations have moved lists from amber to green meaning they are safe to travel to and fro for UK residents. In addition, under-18s and fully vaccinated UK adults will no longer be required to self-isolate when coming from amber-list countries. This could as well be the momentum the tourism industry needs on its path to becoming a £257 billion industry by 2025.

Aside from the spending trends, looking at the specific forms of credit that UK consumers are applying for can give an idea of their perception of the Covid pandemic. Here are the numbers as reported by the Bank of England’s Money and Credit statistical release for May 2021.

In what appears to be a trend reversal in the consumer credit market, the net borrowing on credit facilities like overdrafts, personal loans, and credit cards was reported at £280 million in May compared to a net repayment of £228 million in April.

Personal Loans

New personal loan borrowers are enjoying some of the lowest rates in the UK.  Compared to January 2020 where loans to individuals were priced at 7.03%, May 2021 showed a significant decline in interest rates to 5.61%.

The combination of affordable credit, easing of lockdown restrictions and pent-up demand, is pushing up the needle on personal loan borrowing. As they say, old habits die hard, and we are likely witnessing a return to pre-pandemic borrowing levels.

According to the British Retail Consortium, May retails sales in the UK surged by 10% in comparison with the same month two years ago. This was the highest percentage since the pandemic began. In collaboration with KPMG, the British Retail Consortium further showed that sales figures were up by 13.1% in June compared with the same month in 2019.

Car Finance

Aside from personal loans, car finance was the other key driver behind the increased uptake in consumer credit. The Society of Motor Manufacturers and Traders (SMMT) recorded a total of 186,128 new car registrations in June 2021 compared to 145,377 in June 2020, a 28% annual increase. Private car registrations were at 88,715, a 21.8% increase from the same month last year.

According to the Finance & Leasing Association (FLA), the consumer new car finance market grew by 514% in May 2021 compared with May 2020. The consumer used car finance market also reported a surge in May sales of 270% when compared with the same month in 2020.

Consumers are increasingly becoming optimistic as the UK coronavirus restrictions are eased and the economy is showing signs of recovery.

Mortgages

May 2021 saw net mortgage borrowing bounce back to £6.6 billion. Thanks to the Stamp Duty Land Tax (SDLT) holiday that came into effect on 8 July 2020, buyers of residential properties enjoyed a nil rate band of up to £500,000 of their purchase prices.

The tax holiday was initially meant to end on 31 March 2021, but it was extended to 30 June 2021.  Beginning 1 July 2021 to 30 September 2021, the nil band rate will reduce to £250,000 and on 1 October 2021, it will go back to the standard £125,000. The timing of the end of the SDLT holiday certainly had a huge impact on mortgage applications and approvals as many homebuyers wanted to cash in on the savings.

The surge in net mortgage borrowing in May was preceded by a dip in April of £3.0 billion after March recorded £11.4 billion. The March net borrowings, the strongest since April 1993 when records officially began, were largely driven by the frenzied rush to beat the expected ending of the SDLT holiday. Mortgage approvals stood at 87,500 in May, up 0.69% compared to April’s 86,900.

Conclusion

Following the lifting of most legal restrictions on social contact on 19 July, Britons can now meet and attend events without any limits. Over 68% of UK adults have so far received the full dose of the coronavirus jab and scientific modelling is predicting fewer cases of hospitalisations and serious illnesses than before.

Consumer spending is likely to go up and so is the appetite for consumer credit whether it is personal loans, mortgage, or car dealership finance. The months to come especially from the beginning of August will be interesting to watch as consumers resume their lifestyles.

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