VAT hike sparks instalment credit jump

Store instalment credit jumped sharply during December as consumers bought things on the never-never to beat the impending VAT hike, figures showed today.

The amount borrowed through instalment credit rose by 17 per cent during the month, compared with December 2008, to £260 million, according to the Finance & Leasing Association.

The group attributed the rise to people borrowing money so that they could bring forward big purchases before VAT rose back up to 17.5 per cent at the beginning of this year.

It added that consumers were using instalment credit to fund smaller purchases, such as furniture, white goods and electrical items, typically costing up to £700.

The increase bucked the trend for other forms of credit, with car finance the only other type of lending to show a rise during the month, with this 41 per cent higher than in December 2008 at £907 million, probably due to the Government's scrappage scheme.

Borrowing through credit cards and store cards dipped by 4 per cent and 3 per cent respectively, but the biggest dive was to unsecured loans, with lending dropping by 53 per cent during the month to £113 million.

There was also a steep slide in lending through second-charge mortgages, which enable people to borrow money secured against their home, with advances falling by 48 per cent to £30 million.

Instalment credit was the only type of lending to show an increase for 2009 as a whole, edging ahead by 2 per cent to £2.56 billion.

But overall lending by FLA members was down 15 per cent at £52.79 billion, with second-charge mortgages and unsecured loans again showing the biggest drops of 84 per cent and 44 per cent respectively.

Fiona Hoyle, head of consumer finance at the FLA, said: "Overall, new consumer lending is down by 15 per cent.

"But the breakdown between different credit products tells us that customers are looking at the financial products available to them, and using credit products to meet specific needs."

She said customers were opting for products such as instalment credit, store and credit cards because they were shorter-term and more flexible, than longer-term products such as second-charge mortgages.

The group said with unemployment still high and uncertainty surrounding the economic recovery, consumers were reluctant to commit themselves to longer-term borrowing.