Lenders predict higher defaults and rein in consumer credit
Lenders are bracing themselves for higher defaults towards the end of the year, as the availability of consumer loans falls.
The Bank of England’s latest quarterly credit conditions survey has revealed that lenders saw slight increases in defaults on secured loans in the three months to the end of August 2022 (the third quarter) and expect this to increase over the next three months to the end of November 2022 (fourth quarter).
Default rates on unsecured lending remained unchanged in the third quarter, but lenders expected the rate to increase in the fourth quarter along with more defaults on credit cards and other loans.
Default rates on loans to corporates increased for small and medium-sized businesses, and was unchanged for large businesses in third quarter. However, these are expected to increase for businesses of all sizes in the fourth quarter.
Read more: Lending demand rose in Q2 as banks plan for squeeze
Meanwhile, the availability of consumer loans is drying up. Respondents to the Bank’s survey said secured credit to households decreased in the third quarter. Lenders expect the availability of secured credit to decrease further over the coming three months.
The same is true of unsecured credit to households and although the overall availability of credit to the corporate sector was unchanged in the three months to the end of August, it is also expected to slightly decrease in the fourth quarter of the year.
Perhaps more concerningly, this report was conducted between 30 August and 16 September 2022, which means any impact from more recent developments, such as the government’s controversial ‘mini budget’, is not captured in these results.
Read more: Brits face “tough decisions and sacrifices” as inflation bites
Demand for loans is a mixed picture given the economic conditions. Lenders reported that demand for secured lending for house purchases decreased in the third quarter and was expected to decrease further in the fourth.
However, demand for secured lending for remortgaging increased in the third quarter, and was expected to increase again in the fourth quarter.
Demand for credit card lending was unchanged in the third quarter, but is expected to increase slightly in the last three months of the year, with demand for unsecured lending is expected to decrease.
Demand for corporate lending from medium-sized businesses was unchanged in the third quarter but is expected to increase slightly for small businesses, and to be unchanged for medium and large businesses through the fourth quarter.
“The availability of loans is expected to dip which could suggest that lenders are tightening their belts amid the uncertainty in the money market at present”, Myron Jobson, senior personal finance analyst at Interactive Investor said.
“With wages expected to further trail behind inflation this year and borrowing costs continue to rise, staying on top of rising prices remains a daily struggle for consumers at the lower end of the income spectrum in particular.”
Read more: Borrowers turn to credit cards and loans amid squeeze on incomes
