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The debt warning
The Bank of England (BoE) warned again on Tuesday about rising debt levels in the UK. Whilst the majority of UK household debt is related to mortgages, other debt such as credit cards, personal loans and car financing have been steadily increasing. In total this debt represents more than £200 billion and the BoE is concerned that in the last two years it has been rising faster than household incomes. The Financial Conduct Authority (FCA) is also concerned about debt, in particular Personal Contract Purchase (PCP) a type of car loan. Last year 4 in 5 new cars were purchased this way. The BoE referred to a “spiral of complacency” – the warning is clear, the Banks need to make it harder to borrow money and PCP providers need to scale back the amount that they are lending.
Professional investors are also concerned about debt. There are growing concerns that the 30+ year run of (mostly) positive returns for corporate and government debt (bonds) is over and the income (yield) being offered by newly issued debt is too low relative to its cost – or to put it another way, the return does not justify the risk. Warnings about big money loans – to business and governments – are also increasing in volume.
What does this mean for investors seeking income?
At present for the average person in the UK, debt is cheap and returns on savings are low. This has been bad news for savers, who have seen little to no return on the cash that they diligently put aside in their savings accounts or cash ISAs. Many have therefore been seeking alternative sources of income from investments which are riskier than cash savings accounts. Investing in these accounts there is a greater chance of their money reducing in value. Traditionally equity income and bond (debt) investing have offered attractive levels of income, but in recent years less so. Peer-to-peer (P2P) lending to businesses is attracting some of these types of investors because the average estimated annual returns are between 3.7% and 12% (at 25 July 2017). P2P is considered its own asset class and income from this type of lending is not expected to follow the same cycles of positive and negative returns as bond funds (corporate and government debt), meaning should bond funds enter a negative period P2P should continue to offer attractive income rates. That is not to say that P2P is without risk, investors should keep up to date with default rates from platforms by checking the businessagent.com P2P comparison table.
What does this mean for businesses seeking loans?
For businesses and entrepreneurs seeking loans, the warning from the BoE could mean that it is harder to obtain a loan from the Banks. Whilst the warnings are focused on the consumer sector, the likelihood is that any tightening on lending by the Banks would also include business lending. For small businesses this would have been problematic in the past as the Banks were the only source of that type of credit outside of family or friends, but not so today. P2P platforms have been recognised by the FCA, are maturing fast and lending increasing amounts to small businesses. The sector is still small compared to the Banks, but it is growing. The rates offered by P2P platforms, and other alternative lenders, can also be more attractive, in some cases, than the Banks. This can be because they have lower overheads, or because certain types of businesses or sectors are more attractive to these types of lenders than they are to the Banks and so they are willing to offer better rates to secure their business. (If you are a business seeking a loan you can type in your details and become visible to more than 70 P2P platforms and alternative lenders via businessagent.com; you can get a quote here.) However, even with these differences you should expect these alternative lending sources to require some form of security for any loan offered – whether against business assets or personal property – and if default rates increase rates on offer will remain competitive but less attractive than today.
Tagged: alternative finance business loans bank of england debt levels peer to peer P2P investing saving
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