Personal borrowing is still rising with the average Briton continuing to lean heavily on credit cards, overdrafts and loans. Figures released by the British Bankers’ Association (BBA) show that in December last year the average growth in consumer credit was 6.6% with most of the demand being for low-cost personal loans. The figures from the BBA show that net borrowing rose by £330 million at the end of last year prompting warnings from debt advice charities that many people attracted by continued record low interest rates were “sleepwalking” into debt.
But despite the warnings, economic analysts said that the ratio of household debt to income remains manageable precisely because interest rates are so low. They said that interest rates will have to rise significantly if the cost of borrowing is to match that last seen on the eve of the financial crisis in 2008.
Other figures from the Council of Mortgage Lenders showed that secured debt reached £20.4 billion at the end of 2016 – 4% lower than it had been in November – bringing the total amount of mortgage debt issued in 2016 to £246 billion. This was a rise of 12% on the previous year and the highest figure since 2008
More people failing to manage their debts
Despite record low interest rates, the number of people experiencing significant problems with debt jumped sharply last year. Figures from the Insolvency Service showed that there were a total of 90,930 personal insolvencies in 2016 across England and Wales, a rise of 13.1 per cent from 2015.
This was the first time in six years that the number of people becoming insolvent had increased year-on-year and followed warnings from the Governor of the Bank of England, Mark Carney, that “vigilance” was going to be needed when it comes to monitoring the levels of consumer debt in the UK.
Personal insolvencies were fuelled by a dramatic increase in the number of individual voluntary arrangements (IVAs) issued. These fell in 2015 but jumped by 23.2% last year to almost 50,000. The figures for debt relief orders (DROs), which are often used as a way to avoid bankruptcy, also rose sharply. These rose to 26,196, an increase of 8.4%.
However, the number of bankruptcies fell to 14,989 or 5.4% but analysts warned that this was because of a change in the rules surrounding DROs which meant that people with larger amounts of debt can now opt for these so-called “bankruptcy lite” options.
Mark Sands, a personal insolvency partner at RSM, said:
In 2015 we saw the lowest levels of personal insolvency in over a decade, but the latest figures for 2016 show that the tide has now turned. Despite record low interest rates and high employment levels during the year, many more people found that they could no longer keep on top of their debts.
Debt warnings from charities
Mike O’Connor, the head of StepChange, the debt charity, said that the signals over debt were flashing red. He added:
Insolvencies are on the increase and consumer credit is hitting pre-financial crisis levels. We have also seen record numbers of people coming to us for debt advice in 2016. It is time to look hard at whether the protections for people in financial difficulty are both adequate and accessible for the future.
Calls for regulator action
Concern over the sustainability of Britain’s debt binge has analysts to call for the Bank of England and other financial regulators to consider a crackdown on lenders. Many lenders have slashed interest rates further this year with some banks now offering loans with APRs of less than 3%. Meanwhile, there is concern about the rise of peer-to-peer lending amongst individuals with Ratesetter and Zopa both offering loans of a little over 3%.
One head of a major UK bank told the Mail on Sunday in January that he expects the Bank of England to step in and crack down on interest rates that he believed were too low. The Bank, he said, could introduce new stress tests which would require the high street lenders to be able to demonstrate that their lending would survive an economic downturn. The Bank of England could also force lenders to raise the amount of capital they have to hold against outstanding loan balances.
Oliver Jones has written for Solution Loans since 2015. His passion for personal finance comes through in the 150+ blog posts he's written since that time. His talent for explaining all things money means he's covered topics as diverse as...Read about Oliver Jones
We use cookies to make your experience on our site even better. They also help us to understand how you use our site. By clicking 'Accept All' you're agreeing to our use of cookies. You can change your cookie preferences by choosing 'Manage Settings' and if you want to know more, you can read our cookie policy.
This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
Cookie
Duration
Description
cookielawinfo-checkbox-analytics
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
cookielawinfo-checkbox-functional
11 months
The cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
cookielawinfo-checkbox-necessary
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
cookielawinfo-checkbox-others
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
cookielawinfo-checkbox-performance
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".
viewed_cookie_policy
11 months
The cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data.
Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.
Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.