Demand for lending on loans and credit cards rises

The Bank of England has published its latest credit survey which has shown that the demand for lending on credit cards and loans rose in the first three months of the year and is expected to do so again this Spring, as households struggle to cope with rising prices.

The survey also showed that demand for mortgages increased slightly in the first three months of 2022, and is expected to rise again in the three months to the end of May.

The Bank of England also expects that mortgage lenders will make it harder to get a mortgage this spring and also predicts that defaults for both mortgages and unsecured lending are expected to increase.

Paul Heywood, Chief Data and Analytics Officer at Equifax UK, said “Today’s figures reflect a situation we have seen developing for a few months now, and we are still a long way from the finish line. Significant portions of the UK population are falling into financial difficulty, with families at the lower end of the income scale being hardest hit. The pressures of the cost-of-living crisis are pushing up demand for credit, especially in the unsecured lending and credit card spaces, while the same inflationary pressures, along with rising interest rates, are quelling demand for discretionary borrowing.”

“On the supply side, credit providers have continued to report an increase in the availability of credit to households for unsecured lending. However, our figures highlight that arrears and defaults in the consumer credit market are already climbing, and there’s a risk at times like this that lenders prioritise borrowers in a stronger financial position. We expect that to intensify in the next quarter as energy prices and National Insurance rises mean that higher costs of living ramp up the risk of loan defaults and heap downward pressure on household income. While lenders are right to be cautious, this crisis is different to the last one, and tools like Open Banking allow credit providers to lend with greater confidence to a wider pool of people.”

Sarah Coles, Senior Personal Finance Analyst, Hargreaves Lansdown said “Plastic is fantastic again, and we are clamouring for more mortgages, but borrowing is set to get tougher. Demand for loans and credit cards boomed at the start of this year. With inflation gathering momentum, and eye-watering price rises for many of the essentials, it has forced more of us to borrow to make ends meet. Credit card borrowing grew faster than any other month on record in February (the most recent month we have data for).”

“But while this feels like a solution in the short term, you’re building up problems for the future, because you’re adding interest and repayments to the ever-growing mountain of monthly costs, which makes it harder and harder to stay on top of our finances each month.”

“Rising rates are compounding the problem. The banks have started to pass rate rises onto borrowers, so you have to stretch your cash even further to cover interest payments. It’s no wonder that the banks say they’re expecting default rates on both mortgages and unsecured lending to rise in the next couple of months.”

“For mortgage borrowers, lending is getting tougher too. A growing number of banks are also factoring higher prices into their mortgage calculations, so borrowers may not be able to get the size of loans they were expecting. Mortgage lenders say they expect to tighten lending as we go through the spring, which could start to apply the brakes on the housing market.”