There are concerns that a surge in optimism about the British economy is leading people to take out more loans than they can truly afford
Professional services network PricewaterhouseCoopers (PwC) have released a new report today, predicting that by the end of 2016 the average UK household will have £10,000 of unsecured debt. In cash terms, this is more than ever before.
‘Precious Plastic’ describes how unsecured debt rose by nearly £20bn (nine per cent) in 2014, its fastest growth rate in at least a decade, and now stands at £239bn. This represents around £9,000 per household, which surpasses the pre-crisis peak.
PwC predict that total household debt (including secured debt) to income ratio will reach around 172 per cent by 2020 – exceeding its previous peak in the run up to the crisis. They warn that this debt, when coupled with interest rates, could leave households struggling to meet ends meet. For example, the analysis indicates that a two per cent point rise in interest rates on total household debt (including secured debt) would leave households in need of an extra £1,000 a year – just to cover the additional interest costs.
Simon Westcott, a director in PwC’s financial services practice, said:
“Underlying this significant growth in overall unsecured borrowing, we also saw changes in the way people borrow. Old favourites such as credit cards are staging something of a revival, while newer forms of borrowing such as peer-to-peer lending are starting to gain ground.
“As the total household debt to income ratio heads towards 172 per cent – exceeding its previous peak in the run up to the financial crisis – and interest rates increase, consumers could begin to feel squeezed once again. This could undermine growth for lenders and feed through to resurgence in bad debt.”
The increase in debt could be partly due to the perceived improvement in Britain’s economic background. A joint PwC/YouGov survey about British attitudes towards debt revealed that most people feel confident about their finances and their ability to pay debts, with only 18 per cent of people worried about how they will make future repayments. This is down from 26 per cent in the last survey.
People are also less worried about job security than they were in the last survey, with only 13 per cent concerned about losing their job over the next year, down from 16 per cent in 2013 and 20 per cent in 2011.
But PwC warn that Britons may be underestimating the cost of debt. Just 21 per cent of respondents correctly estimated the cost of a mortgage when given a number of options. And almost half £9.1bn of last year’s increase came from student borrowing, with PwC estimating that graduates who started studying after 2012 could leave with average debts of £40,000 to £50,000. This suggests that students may not fully understand the true cost of the tuition fees hike until years after they have graduated.
The analysis also shows that increased financial confidence cannot fully explain the rise in debt. Dependence on credit for essential items increased significantly among 35 to 44 year olds, with around 20 per cent of this age group borrowing just to make it to the end of the month.
Ruby Stockham is a staff writer at Left Foot Forward. Follow her on Twitter
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