Pricing Strategies in the UK Personal Loan Market 2007

The UK unsecured personal loan market remains dominated by aggressive pricing, despite several increases in the base rate. Indeed, price continues to rule in lenders' customer acquisition strategies. However, high levels of personal indebtedness have meant that an increasing number of unsecured loan providers are prioritizing profitability over market share.



Report Highlights
Further analysis by provider reveals that the majority of unsecured personal loan providers offer a typical interest rate below the seven per cent mark. Given the current difficult lending environment lenders are operating in, many have had to review their pricing and acquisition models. While some continue to focus mainly on prices, others are looking at reducing risk. 2006 has seen a few major lenders switching to 'personal pricing' or 'individual pricing', as a result of rising personal debt levels.


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CATALYST 1
SUMMARY 1
ANALYSIS 2
Price remains the acquisition weapon of choice in the UK unsecured personal loan sector 2
Price is a key product differentiator for both lenders and customers 2
Consequently, the average price of an unsecured loan has fallen considerably 2
Indeed, intense price competition in the UK unsecured personal loan market has led to a significant fall in average prices 3
However, lenders are adjusting their pricing models to a difficult lending environment 6
Rising personal debt has dealt a big blow to lenders' acquisition and profitability model 6
Consumers are increasingly resorting to debt solutions as they fail to keep up with repayments 7
Lenders' profitability has been affected significantly, as many consumers have started to default on repayments 9
It is therefore hardly surprising that many unsecured providers are adapting their acquisition and pricing model to reflect changes in the lending environment 9
Lenders' pricing models are changing as lenders are adapting their acquisition models 10
Will we see more lenders focusing on profitability rather than just increasing market share? 13
The great majority of unsecured loan providers practice a risk-based pricing model 13
Personal pricing has emerged in the last year or so 14
Furthermore, there are other examples where lenders are designing their pricing strategies to increase profitability 16
Going forward, pricing will remain aggressive but profitability will be equally as important, if not more so 17
APPENDIX 19
Supplementary data 19
Definitions 24
APR 24
Balances outstanding 24
Bank of England base rate 24
CAGR 24
Consumer credit 25
Gross advances 25
IVAs (Individual Voluntary Arrangements) 25
Methodology 25
Further reading 25
European consumer credit reports 25
UK consumer credit reports 26
UK consumer credit briefings 26
Ask the analyst 27
Datamonitor consulting 27
Disclaimer 27

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Table 1: Typical interest rates offered by a sample of unsecured personal loan providers, Dec 2005 and March 2007 (Table 1 of 2) 11
Table 2: Typical interest rates offered by a sample of unsecured personal loan providers, Dec 2005 and March 2007 (Table 2 of 2) 12
Table 3: Unsecured personal loan providers' pricing strategies, March 2007 14
Table 4: Typical APR charged by a sample of lenders at branches and online, March 2007 16
Table 5: Typical APR for online loans from a sample of parent companies and their direct subsidiaries, March 2007 17
Table 6: End month weighted average interest rate on a £10,000 and a £3,500 unsecured personal loan and the base rate, Jan 2001 to March 2007 (Table 1 of 3) 19
Table 7: End month weighted average interest rate on a £10,000 and a £3,500 unsecured personal loan and the base rate, Jan 2001 to March 2007 (Table 2 of 3) 20
Table 8: End month weighted average interest rate on a £10,000 and a £3,500 unsecured personal loan and the base rate, Jan 2001 to March 2007 (Table 3 of 3) 21
Table 9: The differential between the base rate and the average interest rate of a £10,000 and £3,500 unsecured loan, January 2001 to March 2007 (Table 1 of 3) 21
Table 10: The differential between the base rate and the average interest rate of a £10,000 and £3,500 unsecured loan, January 2001 to March 2007 (Table 2 of 3) 22
Table 11: The differential between the base rate and the average interest rate of a £10,000 and £3,500 unsecured loan, January 2001 to March 2007 (Table 3 of 3) 23
Table 12: Number of providers split by various typical interest rate brackets, December 2005 and 2006, March 2007 24



Figure 1: Interest rates in the unsecured personal loan market are dynamic, January 2001 to March 2007 3
Figure 2: The differential between the base rate and the average interest rate of an unsecured loan has fallen over the years, January 2001 to March 2007 4
Figure 3: The majority of lenders offer a typical interest rate below the seven per cent mark, December 2005 and 2006, March 2007 5
Figure 4: The average UK adult owed £4,522 in unsecured personal debt as at the end of 2006, 2002-2006 7
Figure 5: Both the number of IVAs approved and bankruptcy orders have risen significantly since 2005, 2002 and 2006 8

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