With so many providers, competition and product innovation - what are the main features differentiating loans products?

What are the most common uses of personal loans?

By the end of 2001, the amount of consumer credit outstanding had risen by over 10% to an estimated £140.6 billion, equivalent to an average household debt of £5,500.

Demand for credit increased substantially in 2001, particularly for unsecured personal loans - the subject of this report. By the end of the year, the amount of consumer credit outstanding had risen by over 10% to an estimated £140.6 billion, equivalent to an average household debt of £5,500, excluding mortgages. The growth in borrowing has been fuelled by low interest rates and high levels of consumer confidence and spending, underpinned by a healthy economy and a robust housing market.

Roughly half of all consumer credit still owing is attributable to personal loans. The remainder is made up of credit cards, overdrafts and mail order catalogues, as well as store cards and point-of-purchase finance agreements. Personal loans are a popular source of credit, especially for longer-term borrowing and for more expensive purchases. Mintel's research indicates that 17% of adults have a personal loan, which equates to around 8 million people in the UK.

The most common uses of a personal loan are to purchase a new car or holiday, to fund home improvements, and to consolidate other debts. To reflect different consumer needs, various types of loan have evolved - standard, flexible, car purchase, home improvement and consolidation/credit refinance - which are either secured or unsecured. Secured personal loans are set against the borrower's property as security, and therefore the interest rate tends to be lower than for unsecured loans. However, in terms of quantity and value, unsecured loans comprise the bulk of personal lending.

The amount borrowed can vary from £500 to £25,000 and is usually repayable over a period of between six months and ten years. Interest charged on the amount borrowed is usually fixed, although some lenders offer variable rates and provide more flexible options of over- or under payments without penalty. Interest rates also vary enormously among providers. As an example, an unsecured loan of £5,000 repayable over three years currently has an annual percentage rate (APR) ranging from 8% to 16% for customers with sound credit histories.

The high street banks - Barclays, HBOS, HSBC, Lloyds TSB, NatWest and The Royal Bank of Scotland - dominate the sector. Their success owes much to their strategy of targeting existing customers, as well as having extensive branch networks. Personal loans are also offered by building societies, Internet banks and retailers, specialist finance houses and loan companies. A number of foreign-based banks are also active in the UK lending market, and new entrants are still appearing especially via the online route and from non-financial backgrounds. Companies that have recently launched personal loan products, or are soon to, include EasyMoney, part of Easy Group, and the finance arm of Manchester United FC. Consequently, competition and product and price differentiation have intensified.

This report will explore these issues and others that are impacting on the market, including interest rates, consumer confidence, household income and spending, and the proposed changes to the Consumer Credit Act. The other main aspects covered in the report are market size, market structure and the key players, distribution, advertising and promotion, and market outlook, as well as consumer attitudes towards personal loans.

Other reports of relevance include:

- Impact of Financial Information on Consumers, Finance Intelligence - UK Report, November 2001

- Sub-prime Lending, Finance Intelligence - UK Report, October 2001

- Affinity and Loyalty Cards, Finance Intelligence - UK Report, September 2001

- Credit and Debit Cards, Finance Intelligence - UK Report, August 2001

- Car Finance, Finance Intelligence - UK Report, May 2001

- Point-of-Purchase Finance, Finance Intelligence - UK Report, April 2002

- Innovation in Financial Services - UK Report, April 2002.