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04.01.2018

2018 is the year to first foot debt problems

News reports, at this time of year, of how people have over indulged in borrowing and spending, are as traditional as mince pies, holly and turkey.

There are two ways of looking at it. First, they represent our guilt at having spent too much and constitute our penance, until sufficient time has passed to allow us to forget our excesses (usually by next pay day); or, alternatively, as a nation we enjoy believing the worst of each other and take great satisfaction at the thought that others have over indulged and will soon suffer the consequences.

There is no word in the English language, for this latter sentiment, but the German language has one: schradenfreude. To take pleasure from another’s misfortune.

The problem is, this allows a complacency to develop amongst us, as we anticipate these stories each year, but also expect them to pass into distant memory within a few weeks.

However, there is now an abundance of evidence to suggest current levels of consumer debt in the UK are at dangerous levels and following a trajectory that means the concerns being raised, simply cannot be dismissed as scaremongering by journalists.

The reality is for several years now personal debt in the UK has been rising.

In early 2017, the Bank of England, warned and then warned again, that personal debt levels were rising too fast.  However, with no evidence that consumer lending was being reigned in, in the latter half of 2017, the Bank of England forced high street banks to place more money in reserves to insure against possible defaults.

In November they then decided to raise interest rates for the first time in 10 years, thereby increasing the cost for high street banks to borrow and, therefore, the cost for consumers to borrow.

However, none of this appears to have been sufficient to have averted what now appears to be concerns that as many as 8 million consumers this year will fall behind with their finances. These concerns follow a survey that was commissioned by the National Debtline, which is owned by the Money Advice Trust.

The survey, which polled 2,000 people and was carried out by YouGov, found that 16% of those surveyed admitted they now expected to fall behind with their finances in 2018, up by 11% on results from a similar survey carried out in the previous year. Over 1,000 (55%) said they had not managed to save anything before Christmas and 37% said they had paid for Christmas with credit.

It is also now anticipated that personal debt levels will become a major policy issue for the UK oppositions parties, with Shadow Chancellor, John McDonnell in the last few days making it a key policy issue in statements to the press.

In his statement, John McDonnell, drew attention to the fact that the ratio between household debt and household income is now at a five-year high, and is anticipated to rise to 150% by 2022. This means for some families their personal debt levels will be the equivalent of one and half year’s income.

It also follows on from a survey of economists conducted by the Financial Times, which found most of them believed UK consumers would struggle as much in 2018 as they did in 2017, if not more.

The prevailing view being that although inflation was likely to subside in 2018, rising interest rates, stagnating incomes and falling employment levels were likely to damage consumer confidence. They also warned that affordable credit, which many have been relying on, will be less accessible in 2018.

The net effect is, if people are making new years resolutions, addressing personal debt should now be on their list of priorities.

The importance of this was emphasised last November when R3, the UK insolvency body, carried out another survey which found over one third of UK adults, with everyday financial products, would struggle if interest rates were to rise by just 1%.

Their research found 46% of adults with payday loans would struggle if interest rates rose, as would 43% of adults with bank loans. They also found that for those with mortgages, a 1% increase would present a challenge, as it would for 39% of adults with overdrafts, 38% with mortgages and 37% of those with Personal Contract Purchase car loans. For those with credit cards, the figure was 35%.

The reality is what is facing the UK is not traditional, but quite exceptional. If such large numbers of consumers would struggle to cope with a 1% rise in interest rates, then they are already over indebted. They would not pass the 3% increased cost, affordability test that the Bank of England expects lenders to ensure consumers can afford before they lend to them.

Equally, if people are deciding what bills they can and cannot pay, then the time for them to seek advice has come.

UK consumers, however, are fortunate. They have the benefit of being able to access a wide range of personal debt solutions, from Individual Voluntary Arrangements in England, Wales, and Northern Ireland to Protected Trust Deeds and the Debt Arrangement Scheme in Scotland.

However, to get the benefits of these solutions, they need to be pro-active in seeking them out.  All the evidence suggests that for millions, 2018 is the year they should be first footing their debt problems and not waiting for their lenders and debt collectors to first foot them.

If you need more information about the options available to you in dealing with your debt, you can always speak confidentially with one of our friendly advisors on 0808 2085 198.