Personal debt fell sharply in the wake of 2008’s financial crisis, but figures from 2016 show it’s growing again fast. Mortgage borrowing and unsecured loans have risen, with the average household owing a record figure of £12,887 even without mortgages.
Record Household Debt
Both the British Bankers’ Association and the TUC have highlighted sharp rises in personal debt in the closing months of 2016, with the BBA putting annual growth in consumer credit to December at 6.6%, representing a net rise of £330m.
The TUC, using figures from the Office of National Statistics over July to September 2016, put total unsecured debt at £349bn. According to the Money Charity website, this means the average adult will be paying £1,001 this year in interest alone, representing 3.79% of average salary.
At the same time, the Council of Mortgage Lenders estimated that mortgage borrowing for 2016 totalled £246bn, up 12% from the previous year and the highest figure since 2008.
What Does It Mean?
Predictably, the BBA and TUC draw very different interpretations from the increase in borrowing. While the BBA see high levels of consumer credit reflecting confidence among consumers, the TUC see households desperate to make ends meet after years of stagnant wages.
The BBA may be right to see the demand for consumer credit as a sign of economic health, but it’s worth remembering that this has been encouraged by record low interest rates. It’s not a given these will continue, especially with the uncertainties surrounding Brexit, the weak pound and the possibility of radical economic measures by the Trump administration. Even those consumers who are currently coping with their loan repayments may find themselves struggling in the future.
The Effect on SMEs
Debt problems for consumers can easily have a knock-on effect for the SMEs that form the bulk of my clients. If large numbers of customers are struggling to make payments on debt repayments, the companies they owe money to will find their cash-flow hit. They in turn may struggle in paying their own bills, and it’s probable that insolvencies will rise.
The situation is especially likely to hit domestic landlords. Already having difficulties due to recent government measures, those who’ve invested in the buy-to-let sector could well see increasing numbers of tenants defaulting on their rent.
We can hope that the BBA’s optimism is well-founded and there’s nothing to worry about, but SMEs would be well advised to plan for difficult times, just in case. And to get in touch with me if you’re already having problems with customers’ payments.