Is the UK obsession with loans out of control or are personal debt levels "comfortable"?
By Richard Green
Since the 1990s, when the average homeowner owed around £31 thousand, levels of personal debt have nearly trebled to £84 thousand. However, according to the Alliance & Leicester, UK personal borrowing levels are at present "comfortable".
At a time when personal debt in the UK exceeds £1.3 trillion on mortgages, credit cards and other loans; with unsecured credit card debt on the increase; and the number of personal bankruptcy declarations hitting an all time record high, this type of statement may seem to be inaccurate and perhaps even inappropriate. However, Chris Rhodes, the Managing Director of the Retail Banking sector of the Alliance & Leicester, believes that much of the bankruptcy situation is primarily due to changes in financial legislation which has occurred during the past few years, making declarations easier, and that personal debt is really under control.
This assertion has been made amid a rise in incomes which means that the servicing of this debt in 1990 used up to 33% of the borrower's income, whereas today only it requires about 20% of the borrower's income. In absolute terms this is seen to represent an increase in the general affordability levels required to maintain the current intensity of personal loans.
In a BBC interview, Chris Rhodes did state, however, that it would not take much of an increase in the debt-to-income balance to occur before the situation becomes significantly more worrying, and he urged consumers to moderate their behavior over the next 12 months and take on less debt as compared with the last four years.
In light of these increases in personal debt over the last few years, Keith Stevens, of the chartered accountants firm Wilkins, last year sounded a warning note:
"Creditors profit by lending money to people and collecting interest, and the longer they can keep that cycle going the better for them. Unless borrowers own property of significant value, it's often not in creditors' interest to call in their debts."
Mr Stevens also stated that he believed some creditors were increasingly taking a hands-off approach, allowing debtors to pile up large amounts of debt and then collecting interest and penalty charges for as long as borrowers were able to continue paying. This has lead to an increase in the number of borrowers filing for bankruptcy themselves when previously they would have been forced into it earlier by their lenders.
Independent financial adviser, Alan Steele, believes that:
"Debt has always been a problem for a minority of people. One of the current problems is the willingness of bank managers to hand out loans and credit cards, which means this minority has increased, but the majority are coping with their debt."
Free information on loan rates, from comparison websites like Moneynet or Motley Fool can help locate the lowest rates for loans and thereby reduce the overall financial burden of incurring high interest charges. But more responsible attitudes to personal finances are also required from both the borrowers and the lenders, alongside improved consumer protection legislation.
Where once the UK was seen as a nation that held up thrift as being a virtue and considered debt a vice, it has now completely changed to a nation that lives on borrowing.
All information contained in this article, is for general information purposes only and should not be construed as advice under the Financial Services Act 1986. You are strongly advised to take appropriate professional and legal advice before entering into any binding contracts.
About the Author
Richard lives in Edinburgh, occasionally writing for the personal finance blog Cashzilla, and talks to himself a lot.
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