Rate of non-performing loans remains low
The cost of servicing consumer credit has not changed significantly for households since the beginning of monetary policy tightening in July 2022.
Personal loans taken out by Irish consumers grew strongly last year — up by 8.2% despite the rapid rise in ECB interest rates, a new report from the Central Bank has found.
An overview of the consumer credit market in Ireland published yesterday found that despite the additional burden placed on household finances caused by recent inflation and the slowdown in domestic and global economic activity, the share of loan balances that are non-performing remains low, at 2%.
The Central Bank said this resilience is likely explained by strong domestic economic growth in recent years coupled with a strong labour market and healthy household balance sheets. They also note that the percentage of Irish credit cards’ available limit that is used in any given month has increased somewhat, but not significantly. High usage can be an indicator of borrower distress.
In their analysis, the Central Bank found that the vast majority of outstanding credit from financial institutions relates to mortgages, but 12% of household credit is for consumer purposes, with total outstanding balances of €17.8bn.
Of this, €10.8bn is for personal loans with an average outstanding balance of €7,500. A further €4.8bn relates to asset finance, largely for motor vehicles, with an average outstanding balance of €14,197. Households also owe €2.2bn on credit cards, overdrafts, and other credit agreements with no pre-agreed end date, such as catalogue credit.
The cost of servicing consumer credit has not changed significantly for households since the beginning of monetary policy tightening in July 2022 and the interest rate on new consumer loans in Ireland stood at 7.98% in the year to December. Credit unions, collectively, are the leading providers of personal loans, with retail banks providing credit cards and overdrafts while asset finance is provided by non-bank financial intermediaries.
The vast majority of loan agreements were short-term. As of December 2023, some 89% of personal loans and asset finance agreements were originated in 2018 or later.
The analysis by the Central Bank found that at four major consumer lenders, one-third of consumer credit drawn down between 2020 and 2023 was to finance motor vehicles, and a further one-third was for home improvements.
"High interest rates, inflation above the ECB’s 2% target, and moderating growth in many parts of the world may lead to the emergence of new risks to financial stability," the analysis notes.
"Faced with this uncertainty, it is important for policymakers to regularly review all lending sectors to identify at an early stage any emerging pockets of vulnerabilities."
