With mounting pressures on UK banks post BREXIT; FCA refusing to public its report on RBS’s (Royal Bank of Scotland) treatment of small businesses; escalating outstanding personal loans in Britain and reaching lowest point in mortgage lending since January 2015, what are the takeaways for a borrower in the Great Britain.
While on the one hand, the Bank of England has emphasized on curbing unsecured lending, the emerging FinTech landscape turns out to be one of the favorite pools for borrowers seeking loans to gap fill their credit requirements. The recent stats indicate that Household debt in the UK has increased 7% in the past five years while the wages remain significantly stagnant.
Also previous reports have highlighted that 80 percent of payday borrowers are the ones with credit hassles and they prefer to contact private funding resources for the desired loans.Just a few days ago, the Bank of England had pointed out that an interest rate hike is expected by May of this year. The news just comes by when the level of consumer credit is mushrooming more than wages rate.
With so many news headlines making the round while signalling uncertainty clouds in the economy, the pertinent question for a borrower is — Are we yet ready for increase in interest rate? Are already laid back UK households’ struggling to meet their ends ready for a hike (as signalled by the central bank) in interest rate?
At this point in time, a rise in interest rate would cause unsecured loans even more difficult to afford; not to forget, the widening distance from the main street lenders in this category. Right from your mortgage to small personal loans, car loans and credit bills and personal loans would be more expensive.
While consumer spending increased more than income increase, in 2017; the January 2018 points weaker retail sales in UK. The British Chambers of Commerce has also extended a warning that UK companies may face a recruitment crisis post crisis. With the expected shortage of talent, the government is requested to produce details on post-Brexit immigration system by some sectors.
Despite inflation and such confusing statistics owing to post Brexit economic frontiers, the spending remained to rise among lower income groups, signaling dried savings.This also implies the struggle these households are facing for their basis expenses including food and shelter.
According to Christians Against Poverty (CAP) (as reported by BBC) January 2018 was its busiest ever month as it received highest requests for debt advice till date.
Also, UK Finance (which covers 10 largest UK banks and building societies) showed in its study that the total value of outstanding loans has increased by 25% since 2013-14. While wage data from the Office for National Statistics (ONS) indicate that a pay increase (for a full time worked) by only 6.5% over the same period.In all, British households have gathered £37bn as “unpaid personals loans” in 2017 which is £7bn more than what they had in 2015.
Rising debt cost and inflation with minuscule rise in pay eventually indicate a pressure on some households to borrow to meet the ends.
In fact many households in 2017 already displayed signs of ‘debt distress’ reported Resolution Foundation report. It says 30% of working age households have shown at least one sign of debt distress; wherein including 21% faced difficulty paying their accommodation; and 17 % found unsecured debt as a heavy burden.
What is a takeaway?
The chief economist at the Resolution Foundation, Matt Whittaker says: “Rapidly rising consumer credit and the prospect of faster interest rate rises have led some to warn loudly of the imminent bursting of another credit bubble. But these fears appear to be overblown, with much of the recent credit growth being driven by higher income households who are much better placed to service their debts.”
The Financial Conduct Authority (FCA) also leveled played the fears by saying recently that the “vast majority” of loans went to people who could afford repayments.
Nevertheless, even if we accept that on the whole Britain is well ready for rise in interest rate, policy makers must consider the situation of those in low income groups as they are the ones who are already struggling to pay their debts, and a rise in interest rate would hit them hardest.
On a brighter side, it is worthwhile to note here that the cost of servicing Britain’s household debt is low by historical standards as repayments are currently accounting for 7.7 per cent of disposable income. This level is far below the 12.3 per cent that was recorded just before the financial crisis (2008). The level is in line with what was recorded during the mid-1990s and early 2000s. (Resolution Foundation report).
Emma Adams is working as a loan adviser with 786loans.uk, which is an online loan broking company in UK.