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Debt levels are at an all time high in the
UK. The younger generation tend to be feeling
the pinch the most, but parents are increasingly
being required to bail them out, often at great
expense to their own limited mortgage or
retirement savings.
It has become almost accepted as a fact of
life that graduates will begin their careers
with a considerable level of personal debt. The
Association of Investment Trust Companies found
that on average students expected to graduate
with £7,208 of debt, while parents believed
it would be nearer to £9,741, however the
real average was found to be currently running
at £13,501. Graduates then need to service
credit cards, take out a mortgage, then cover
the payments, repay university loans, not to
mention the pressure to start saving earlier,
and save more, for their retirement, whilst the
basic state pension increasingly becomes
inadequate. The government revealed in June that
student debt for 2003-04 was seven times higher
than they were in 1994-95 and the Student Loans
Company has shown that debts owed to them has
risen to more than £13bn.
It is not only students who face financial
difficulties early in life. Consumer Credit
Counselling Services Scotland ( http://www.cccs.co.uk/
), has indicated that young adults in general,
under the age of 25, now account for more than
10 per cent of the estimated 32,000 people who
have fallen into severe arrears on non-mortgage
debts of more than £1 billion.
Malcolm Hurlston, Chairman of the Consumer
Credit Counselling Services (CCCS) said, "It
is noticeable that young people are accounting
for an increasing proportion and the number of
them seeking assistance has risen by about 25
per cent over the past two years or so."
Analysts have been bracing themselves for
news of a sharp increase in adverse debt levels
from the major high street banks following
report figures of a 21 per cent increase in bad
debts levels at Lloyds TSB. City analysts expect
HBOS and Royal Bank of Scotland to declare that
bad debt charges have risen by around 20% in
their personal banking businesses, and Barclays,
HSBC and Alliance & Leicester are all
expected to tell a similar tale of rising loan
defaults. Citigroup analysts are expecting bad
debt charges from its retail banking division to
rise about 24% in the first half of this year to
£230m, while last year HBOS's provisions
for bad debt rose from £1bn to
£1.2bn.
Keith Stevens, of the chartered accountants
firm Wilkins Kennedy, said: "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."
He also continued 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.
House repossessions have also significantly
increased over the past year, with the Council
of Mortgage Lenders announcing 4,640 home
repossessions during the first half of 2005,
compared with 3,070 for the last half of 2004.
Government figures show that there has also been
an increase in the number of homeowners being
taken to court for mortgage arrears.
Some of the major banks and financial service
providers have taken the initiative and started
to help police the growing adverse debt problems
with HSBC announcing that it will share their
full credit record, of both positive and
negative information, on its personal customers
with other regulated financial services
companies through the Experian, Equifax and
CallCredit credit reference agencies, in efforts
to keep tabs on its consumers' debt.
Michael Geoghegan, Chief Executive of HSBC
said: "It is no more in the interests of a
customer to borrow more money than they can
afford than it is for a bank to lend them the
money." The move has been widely heralded by
analysts, as Michael Geoghegan added, "It is the
only way to ensure that lenders properly
understand the full financial exposure of
customers before they let them sign up to debt
that some simply can't afford."
This all comes amidst media pressure for
financial firms to become more responsible. One
case widely featured in the news concerns a
couple who took out the £5,740 loan at
34.9% APR for house improvements, but they were
already in arrears on two prior mortgages, and
became unable to keep up the loan repayments.
Over the course of the 15 year loan term the
amount repayable had escalated to £384,000.
Attempts by the loan company to still enforce
the huge debt, eventually had to be fought off
by the couple through the law courts.
The couple urged others considering taking
out a loan to seek advice and to, "obviously
read the small print and ask the questions that
perhaps you don't think about at the time, and
just make sure you know exactly what the
consequences are should anything go wrong".
There are currently many sources of
information to help consumers make decisions
regarding their finances and debt levels.
Financial comparison sites like Moneynet can
provide impartial information on loans,
mortgages, adverse credit, etc, to find the best
product for individual circumstances. Consumer
help sites like the National Debtline provide
free confidential and independent advice on how
to deal with debt problems, and the Citizens
Advice Bureau are there with trained volunteers
to help with legal, monetary and other problems,
through a free, independent and confidential
advice service.
The more help and information that is
available to consumers and the more responsible
the lending agencies become, the safer finance
will be for the most vulnerable who are looking
to borrow money, to prevent them getting into
un-repayable levels of debt, however these
services can only be of help if people actually
use them.
Malcolm Hurlston of CCCS said, "We are
advising about 4,000 people in Scotland and I
would estimate that our figures represent only
about one in eight of those who need
help".
Financial education is something needs to be
provided at an early stage to make people
realise the importance of taking on the
accountability for their own finances, as well
as highlighting where to access help for when it
is required. Budgeting is a subject many school
leavers have little practical knowledge of, but
one which they desperately need to be made aware
of before they start to control their own
finances.
Where there is existing advice or help, this
must be made available and known to all in order
to prevent more people getting too deeply into
debt, or falling prey to loan sharks like the
recent case of Mark Washington Johnson who has
been jailed in Birmingham for nearly four years.
Mr Johnson was found guilty of charging up to
8,000 per cent interest on loans, taking Social
Security benefit books or National Insurance
numbers as "security" for the unauthorised loans
and then piling on default charges for missed
payments. If we are to prevent this sort of
abuse occurring to the weakest members of
society then public awareness needs to be raised
and the most vulnerable people given the
assistance best suited to understand and control
their own money.
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