How are we really managing our debts?
IN recent years the UK has seen a lending boom, with borrowing at its highest levels since before the financial crash.
With debt levels so high, this guide aims to tackle the big question of how well we in the UK are managing our debts.
We'll take a look at the current state of personal borrowing and what trends can be discerned from the data. We'll also cover the key reasons why people borrow and go over some signs that borrowing has become a problem.
Keep reading for the full guide or click on the links in the menu opposite to jump to a specific section.
Personal debt includes all forms of borrowing, from mortgages and bank loans to credit cards and overdrafts.
Over the past ten years, the levels of personal debt in the UK have steadily increased.
In fact, between 2012 and 2017 total debt for UK consumers rose by 7.35% and is at the highest level since the financial crisis of 2008.
The following statistics from The Money Charity for April 2017 give a good picture of where UK household debt currently stands:
- Total UK household borrowing grew by £886.84 per adult from April 2016 to April 2017.
- Average total household debt stands at £56,750 when mortgages are included.
- Consumer credit debt rose by £290.98 per adult from April 2016 to April 2017.
- That's an average credit debt of £7,349 per household, up £543.70 over the year April 2016 to 2017.
- Credit card debt specifically stands at £2,521 per adult.
- Total net lending to individuals by banks and building societies rose by £4.3 billion in April 2017 alone.
These statistics give a good overview of current borrowing by UK individuals, and its evident that across every sphere debt is continuing to grow.
Trends in personal borrowing vary depending on a number of different factors, but an individual's age can have a big impact on their debt levels.
18 - 30
Millions of young people are affected by debt and this age group is now the most likely to suffer from debt-related problems.
It's not just student loans that are to blame, but they do play a part.
Due to increases in tuition fees and a reduction in Government funding for universities - transferring the burden to students - student borrowing has risen massively in recent years.
From March 2016 until March 2017 student loan debt increased by 16.6%, and according to The Money Charity the average debt burden for those who graduated in 2016 was £24,640.
When we take into consideration the fact that real wages remain in negative territory, decreasing by 0.4% from May to July of 2017, the reality of students being able to earn enough to pay off their student debt is increasingly unlikely.
Indeed, the Government expects to write off at least 40% of total student debt.
R3, the insolvency trade body, regularly surveys British adults about debt. It found in its September 2017 survey that 65% of 18 - 24 years olds who were in debt were specifically worried about their student debt.
In addition to the burden of repaying student loans, many young people also have growing levels of consumer debt.
There is also a backdrop of exploding unsecured debt among young people.
Forms of borrowing are also increasingly varied, including credit cards, payday loans, bank loans and borrowing from family and friends.
A survey conducted by National Debtline in 2016 found that, when mortgages and student loans were excluded, just over 30% of 18 - 24 year olds were in debt, owing an average of £3,409.
Worryingly, 30% of those who were already in debt said they had no plans to repay the money and 32% thought that their debts were a 'heavy burden'.
This age group is also highly unlikely to ask for help with a debt problem, with only 2% of those involved in the research having gone to a debt advice charity.
30 - 60
According to research by debt charity StepChange, the people coming to them for advice are getting younger.
Almost two-thirds of their clients were under 40 over the past five years, and they have seen a 10% increase in the number of under-40s contacting them since 2013.
StepChange also state that middle-age is when most people are likely to encounter a debt problem because of ill health - perhaps surprisingly even more than the over-60 age group.
They state that over half of their clients in the 40 - 59 age bracket give ill health as the primary reason for being in debt.
Ill health can lead to additional debt because of the subsequent loss of income, and measures that are taken to bridge the gap, such as taking out a payday loan, can make the problem worse.
Additionally, a redundancy and a reduction in working hours can also lead to an increase in borrowing, and this working age group is most likely to be hit with both.
As previously mentioned, the debt burden for young people is growing. However, debt is still a problem for the over-60 age group too.
Research from Old Mutual Wealth, which was based on a YouGov survey of people aged 50 - 75, found that in 2015 30% of retirees were in debt and that one in ten owed over £100,000.
Debt for this age category included mortgages - with 21% of retirees still paying off their house after retirement - as well as credit and store cards (14%), and unsecured loans (6%).
The average debt owed by this age group was £34,600.
Very low returns on savings do not help this group either, particularly as they tend to have the largest savings pots.
The Money Charity also reported that the average interest rate for an instant access savings account was 0.13% in April 2017 (and 0.39% for a cash ISA).
Although low interest rates keep mortgage payments low they reduce the value of savings, and for this age group the value of savings is particularly important for life after retirement.
Also, the potential for older people to borrow on mortgages has recently increased. This is because Nationwide announced in 2016 that it was increasing the maximum age limit that borrowers could take out a mortgage from 75 to 85. Halifax followed suit and increased its upper age limit from 75 to 80.
Traditionally, this age group has faced difficulty borrowing for a mortgage because of strict rules about repayment periods and the impact of retirement on their ability to repay.
But it's important to remember that taking on more debt in older age means less money for savings, and as we mentioned, this could be needed for financial support after retirement or possibly for care in older life.
There is further guidance available here on debt in old age.
Aside from categorising by age, there are other groups within society that are more likely to fall into debt.
Financially vulnerable individuals
Those who are unemployed, have a very low income or claim benefits are more likely to borrow because they are financially vulnerable individuals.
Although the UK employment rate is very high at the moment - the Office for National Statistics (ONS) states that the current employment rate is 74.8% and is the joint highest since records began in 1971- for those who aren't in work paying for the essentials is extremely difficult.
Even for those in work this can be challenging due to low wage growth. Figures from The Money Charity show that nearly five million working age people currently claim benefits.
Also, a 2016 report from the Money Advice Service found a strong link between those who earn less than £10,000 per year and high levels of debt. This indicates that having a very low income has a direct impact on how much an individual borrows.
In addition, sudden changes in circumstance can have a big impact on a person's financial wellbeing.
Between January and March 2017, just over 1,000 people each day were made redundant - and the subsequent loss of income can ultimately lead to debt.
Furthermore, those who live in social housing are 8% more likely to have debts than those who privately rent, according to the Money Advice Service report.
Another factor is whether an individual has children.
The Money Charity estimated that the average cost of raising a child until the age of 21 is now £231,843, which averages out at £30.23 per day. This figure has increased a massive 65.1% since The Money Charity began making its reports back in 2003.
Since the average household spends 38% of their income raising children, it's no wonder that having children can add so much additional strain to family finances that borrowing becomes an option many people turn to.
This research also found that single parents are the most likely to be indebted, followed closely by those with three or more children.
Where we live also has an impact on how much we borrow.
Interestingly, StepChange found that those living in London have the worst debt problems, with debt standing at 3.5% higher in the capital than outside of it.
This debt is also not contained to the poorest areas of the city.
While the poorest tend to fall into debt because of arrears on household bills, the most affluent carry debt on credit cards, loans and overdrafts - often precipitated by a sudden life change like divorce.
The Money Advice Service also revealed that areas in the West Midlands, Wales, Northern Ireland and Yorkshire had very high levels of borrowing.
The lowest borrowing levels were found in the South East, the South West and Scotland.
Why are we borrowing?
Debt as investment
For many people, regardless of age, debt is taken on as an investment.
The most obvious example of this is borrowing money for a mortgage, or taking out a personal loan to add an extension onto a house.
According to The Money Charity, the average estimated outstanding mortgage in March 2017 was £120,230 - that's for 11.1 million UK households.
Additionally, the average mortgage interest rate was 2.61% at the end of April, meaning that households would pay on average £3,143 just in interest over the course of a year.
Also, house prices increased on average by 2.1% from May 2016 to May 2017, and for first-time buyers the ONS states that the average house price rose by 5% from April 2016 to 2017.
Although most people can comfortably pay off the mortgage they've taken out, for many the debt burden is too heavy.
According to figures from The Council of Mortgage Lenders, just over 5,000 homes that were occupied by their owners were taken into repossession from March 2016 to 2017, which is equivalent to 14 homes being repossessed every day.
The Bank of England has reported that 40% of those with a mortgage have never faced an interest rate increase, the fear is that these households may not be able to cope with a possible interest rate increase and the additional financial burden this would incur.
Debt as purchases
Another popular form of borrowing is for purchases - coming from unsecured credit cards, loans and overdrafts.
Unsecured loans are often used for high-value financial purchases, such as car insurance while credit cards are more frequently used for non-essential spending, like items placed on store cards, or for big-ticket items like furniture and white goods. Many people dip into their overdrafts because they struggle to make ends meet.
StepChange say that in 2016 the average unsecured debt of their clients increased for the first time in eight years, with an average debt of £14,367.
Also, according to the Bank of England, consumer credit card debts grew at the fastest rate for a decade in February of this year, with £1.4 billion borrowed on credit cards and through personal loans in this month alone.
This increase has been spurred on by incredibly low interest rates that encourage consumers to borrow more.
Interestingly, the interest rate on a £10,000 unsecured loan in February was the lowest figure since records began in 1995, according to the Bank of England.
A theory frequently put forward is that consumers borrow as a kind of therapy: buying more than we really need to make ourselves feel good, rather than because we need the items we've purchased.
However, the consequence of this tends to be buying on credit cards which leads to ongoing worries about debt.
The R3 survey found that these three types of lending were the most worried about by British adults, with credit cards coming out on top (50%), followed by overdrafts (20%) and bank loans (18%).
'Just until payday' debts
R3 also found that 40% or respondents 'sometimes or often' struggle to make it to payday.
The leading cause of this was cited as the high cost of food (56%), followed by household energy (40%), fuel or transport costs (33%), credit card repayments (31%), spending on non-essentials (26%), paying for rent (23%) and paying for a mortgage (14%).
Additionally, for those renting properties, the ONS states that rental prices increased in every English region in 2016, with private renters paying on average £797 each month (the figure is £663 for mortgages).
However, the percentage burden is much higher for renters than for homeowners. The ONS state that the average private renter spends 41% of their income on rent, compared to 18% for those who own and occupy their home.
This is backed up by the R3 research, which found that all renters (private or social) were much more likely to be worried about their debt levels (55%) than homeowners (33%).
The rise in those struggling to pay for essential bills and housing costs comes due to the rising cost of living and the squeeze on wages.
As a result, many people turn to payday loans to help make ends meet until the next wage comes in.
The problem with these loans is that they charge relatively high interest rates and have short repayment periods, because they are only intended to cover a short period of time. So when people cannot repay in time, the costs can spiral.
There's more information on the problems around payday loans here.
According to Citizens Advice the peak for payday loans came in 2013.
However, following a cap on payday loan interest and default fees in 2015 following an FCA investigation, the number of people coming to them for advice dropped dramatically.
In fact, from 2013 to 2016 they saw an 86% reduction in people coming to them for help with payday loans.
In addition, since the 2015 cap 38% of payday loan firms are no longer operational.
Interestingly, Citizens Advice state that the age group most likely to come to them for help about a payday loan is those aged 20 - 35, in this guide which highlighted the growing problem of debt for young people.
They concluded that this was primarily due to the fact that younger people often have an incomplete or non-existent credit history and find it hard to access mainstream banking finance.
This problem was also found by R3, but they discovered that 18 - 24 year olds were most likely to take out a payday loan because of struggles paying rent.
As such, if they need money they are often forced to turn to payday lenders, particularly those that aren't able to borrow from family and friends.
Citizens Advice also found that complainants were more likely to be single, tenants of any kind and those on a very low income - generally less than £1,500 per month.
There's lots of information about alternatives to payday loans here.
When debt becomes a problem
According to R3, 41% of British adults are at least 'fairly worried' about their current debt levels, and there comes a point for some individuals when debt begins to take over their life. At this point it's time to seek help.
There are a number of red flags that debt has become a problem, and one of these is lying about our borrowing.
According to research from Moneysupermarket, 33% of people in debt have lied to cover up how much they owe on loans, credit cards and overdrafts.
Of those who hide debt, 23% keep the problem from family members.
Worryingly, those who lie to their partners specifically (15%) have the highest levels of debt. While they admit to owing on average just under £9,000, the amount actually stands at nearly £17,500 on average.
The research also found that one in ten lie because they fear the person they want to tell would be angry, and just over 40% said they lie because they feel ashamed of their debt problem.
Other signs that debt is a problem are:
- Struggling to afford the essentials, such as housing costs and bills.
- Using credit cards to cover basic costs.
- When the value of debt exceeds an individual's income.
- When debt causes major stress and leads to issues like sleeplessness.
We have more information on how to budget to get debt free in this guide from StepChange.