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.

Debt problems

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.

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