Personal Debt Levels are creeping up again – Have we not learnt from past mistakes?
Whether consumers are more confident in our economic future or just fed-up with austerity, one thing is for sure average personal debt is climbing again.
The proportion of household debt is at its highest for five years, according to an analysis by the TUC. On average, UK homes owed 26.5% of their annual income on loans and credit cards in the third quarter of 2015, the highest rate since 2008.(The figures excluded mortgages and student loans).
The average amount owed by households is now £11,800, which is the highest level yet. However, debt was proportionately greater in 2008, when it reached more than 30% of household income which may account for the lack of caution.
While car loans and retail promotions such as Black Friday are all said to have had an effect on borrowing it also may well be that a significant amount of people have recently been borrowing more due to the squeeze on their purchasing power from wages failing to rise in line with living costs.
The shadow consumer minister, Stella Creasy, said the UK had a “massive looming personal debt crisis” and many households were being forced to borrow to fund living costs. “They’re not buying big fancy TVs and posh holidays – they are borrowing to cover the gap between what they earn and what they need to pay for each month,” she said.
The figures also show no record of people in Debt Management Plans (as opposed to Bankruptcy and IVAs) so really we have no idea of the real extent of the problem.
In the competition for borrowers, banks have focused on balance transfers, with increasingly long interest-free periods offered as an incentive to move debt between lenders. Personal loan rates have also plummeted: two years ago the best-buy £5,000 loan had an interest rate of 7%; now the same amount can be borrowed at 4.9%. Analysts warn this borrowing cannot be sustained long term.
Interestingly though the lessons of the past seem to have passed many by. Despite the rise in personal debt research by R3 in attitude to debts has revealed a record low of 39% of British adults saying they are at least fairly worried about their current level of debt. Debt worries were last this low back in January 2012. This represents a decline in debt worries over the past year: 41% of British adults were at least fairly worried in August 2015 and 46% were in March 2015.
Despite rising prices, British adults continue to be more likely to expect their personal finances to improve (26%) than to worsen (15%) over the next six months. Economic pessimism continues to stand at a record low, remaining at the same level as August 2015 (15%).
It appears we are borrowing more and worrying less, let’s hope the consumer short term memory won’t land the economy back in the classroom to learn the hard lessons of debt all over again.