Can we afford our growing personal debt?August 30, 2017
Individuals in the UK owe a total of £1.5 trillion. That’s works out at £28,000 for every man, woman and child in the country.
While £1.5 trillion is obviously a huge amount, it’s a little difficult to visualise. What does £1.5 trillion actually mean? How many mortgages, cars and kitchens does it buy you?
Put it this way, our total personal debt is more than the GDP of Belgium, Ireland, Hungary, Oman and Argentina. Combined.
It could buy you two and a half Apples, nearly four Microsofts, seven Samsungs or nine Visas.
At current costings, it’s enough to extend HS2 from London through Europe across Asia past the Americas over the Atlantic and back into London, terminating just outside Madame Tussauds.
It’s a lot of money.
We owe so much money that the Bank of England's financial stability director, Alex Brazier, recently took to the stage in Liverpool to issue a warning for the future.
Brazier's worry is that although lending in general has grown in line with the economy, consumer credit has been growing very rapidly over the past two years.
Household debt – like most things that are good in moderation – can be dangerous in excess. Dangerous to borrowers, lenders and most importantly from our perspective, everyone else in the economy.
What do we actually owe?
The vast majority of our debt is made up of mortgages — around £1.3 trillion or 83% of the total. The rest is made up of credit cards, overdrafts and loans.
As you can see from the chart, the amount of lending to individuals ramped up significantly in the years preceding the 2009 credit crunch and crash.
What might surprise you is that the level of household indebtedness did not fall following the crash. In other words, the personal debt problem was not addressed in any fundamental way.
Worryingly, in the last two years, lending levels have rocketed even further.
Brazier was especially careful to highlight the risk of non-mortgage debt (e.g. credit cards, store accounts, personal loans, etc.) which has been growing, once again, at an incredible rate.
Of that non-mortgage debt, £68 billion comes from credit cards. Fueled by low interest rates (the average advertised interest rate has fallen from 8% to 3.8%) and elongating 0% balance transfer periods, credit card debt has shot up.
Over the past year, total credit card debt has increased by a colossal 18%.
Can we afford this?
With the effects of the financial crisis still fresh in our minds, one question is more important than all others. Can we afford this?
Before the financial crash, household debt stood at 160% of household income. While that fell back down to 140%, it’s on the move again.
The Office for Budget Responsibility predicts that it will reach 153% in 2022.
Brazier believes we’re on the edge of irresponsible lending. Buoyed by good economic performance and low loan losses, lenders are reducing their prices and loosening their lending criteria.
Perhaps the most worrying point is the link between debt levels and household incomes.
While the level of personal debt is rising (up 10% over the past three years), household incomes are not. Over the same period, incomes grew by just 1.5%.
While our debt levels may be just about manageable now, we are benefiting from record low interest rates and favourable lending conditions.
Interest rate rises — and it is a question of when not if they rise — combined with the continuing fall in real incomes (where inflation outstrips wage increases) mean those same debt levels will quickly become unmanageable for many people.
Are you struggling with debt?
With competition for credit ramping up, businesses are lending more aggressively. This makes it easier for all of us to access credit.
With advantageous interest rates and businesses fawning over you, it’s easy to wrack up significant personal debt across car loans, credit cards, personal loans and mortgages.
While each individual debt might be manageable, it’s easy to find yourself in a position where you struggle to make payments on all your debts.
A common warning sign is when you are only managing to pay the monthly minimum amounts and you are unable to reduce the total balances outstanding. A more serious warning sign is when you struggle to make even the minimum payments.
If that sounds familiar, it’s important to seek help as quickly as possible.
At 180 Advisory Solutions, our team has helped thousands of clients take control of their personal debt and get their lives back on track.
No matter your level of personal debt, there are options available to you.
For example, we can offer a Debt Arrangement Scheme (DAS), which allows you to avoid insolvency completely while protecting you from your creditors.
So, if you are struggling with personal debt, contact our team today for free, confidential advice.