Over the past decade, we have seen personal debt levels rise dramatically in the UK. According to recent figures from the Bank of England, Britons currently owe c£230 billion in unsecured debt (not including mortgages and secured loans). I have argued the reasons for this rise in debt on a number of occasions and believe that there is no one reason why levels have grown. Rather I believe that the growth of debt is a combination of both the individual’s willingness to borrow and banks willingness to lend.
Why have personal debt levels grown so large in the UK?
A willingness to borrow has been fuelled by a number of factors. Firstly borrowing has become much more acceptable in today’s society. If we look back 20 years, borrowing to pay for household items such as furniture and white goods was far rarer. Back then if you had admitted to paying for your new sofa on HP, eyebrows would have been raised. Now, if you say that you are not going to buy new furniture because you do not want to take credit, this is considered strange.
In addition to society’s changing attitudes towards credit, in the past decade people have (on paper at least) become wealthier than ever before. This is largely due to the significant increase in property prices since the late 1990’s. As prices have risen, home owners have seen the amount of equity in their property vastly increase. This has given many the confidence to increase their personal borrowings safe in the knowledge that they have their house to fall back on through a re-mortgage if things get out of hand.
Hand in hand with the consumer’s willingness to borrow has been the banks willingness to lend. Over the past few years, many banks attitudes to risk became almost blasé. This situation has arguably meant that many individuals have been lent far more than was sensible given that the good times rarely last forever.
Low interest rates have prevented financial disaster
The current economic downturn has caused property prices to significantly fall and lending levels to contract. Many people are suffering financial difficulty because of falling incomes and debts that they can no longer afford to service. Arguably, this situation has been minimised by the Bank of England’s decision to reduce interest rates meaning many current mortgage costs have been significantly reduced. However, if unemployment continues to grow, even this may not be enough to save some borrowers from financial disaster.
Despite all the current gloomy economic news, few people believe that the economy will remain in the Doldrums forever. However, when the recovery does start in earnest, we may find that memories are short and the bad times will swiftly be forgotten. The question is how should we try and protect ourselves from falling quite so deeply into trouble in the future?
How can we prevent personal debt levels from rising out of control in the future?
Some have called for the government to restrict the lending practices of the commercial banks. I do not feel that direct restrictions are the correct course of action if we want to live in a free market society. However, I do believe that bank’s lending practices and marketing tactics were allowed to run too freely during the late 1990 and 2000s. Perhaps regulation surrounding these needs to be tightened. In addition, I believe there should be more done to assist the banks in making their lending decisions. This would involve a greater sharing of information between institutions on the financial health of prospective individual borrowers. However, the is clearly an emotive subject when data protection and privacy issues are taken into consideration.
I also believe that individuals themselves must take a greater responsibility for their future financial wellbeing. One of the skills that has largely been lost from family life is the ability to budget and therefore save for the items we want to buy. If more people were to save for a rainy day, I believe the numbers who find themselves in financial difficulty and have to declare insolvency would be significantly reduced. Of course, making this a reality is easier said than done. However, perhaps one place to start is better financial education in our schools?
Once we climb out of the current financial crisis, I believe that working to reduce the levels of personal debt in the UK and therefore reducing the risk of future problems must be a priority. This will not be easy. It will take the combined efforts of both government, banking institutions and a change in individual attitudes to borrowing and saving. The time to start however is now.
