After several years during which it seemed that you would have a better chance at getting a leprechaun’s pot of gold than you would getting even a secured loan, the Kingdom now seems to be acting like a long-starved waif, frantically gorging at a sumptuous buffet.
In November of 2014 alone, for example, Brits borrowed over £1.25 billion in unsecured credit card loans, unsecured traditional and non-traditional loans, and current account overdrafts. This represented the largest rise in unsecured credit in over seven years, with an average new, unsecured debt of nearly £9,000 per household reached by the end of the year.
According to a report by PriceWaterhouseCoopers (PwC), the average unsecured debt will reach or exceed £10,000 per household by the end of 2016, and by 2020, they project that the total household debt to income ratio will be a staggering 172%. The similarities to the indebtedness pattern that led the world into the most severe recession since the Great Depression are pretty unmistakable.
How Did We Get To This Point?
As consumer confidence slowly creeps back from the abyss, and employment figures continue to rise, Brits, finding themselves wanting to make up for lost time and delayed gratification, are once again seeking credit. At the same time, banks are feeling more confident, and have begun making higher-risk loans than they would have even considered a mere few years ago.
Credit card companies, eager to take advantage of the low interest rates they must pay, are aggressively marketing their willingness to extend higher credit limits to customers with which to consolidate their other debts and card balances.
In response to the recent extended period of virtually unavailable credit, wholly new industries rushed in to provide what the banks would not. Risks were redefined and lessened, while rewards, in the form of higher, loosely-regulated interest rates and terms, proliferated. Peer-to-peer loans, payday loan companies, and even no-credit-check payday loan companies came into being, with many offering small, high-interest and short-term loans to virtually anyone who had a source of income.
And a public, with newfound confidence and a yearning for a means by which to get the things they needed or wanted, but for which the funds were not immediately at hand, clamoured to the new lenders’ doors.
“Confidence is what you feel when you haven’t looked at the whole situation…”
That confidence is a welcome change from the melancholy of recent years, but the rate at which it is being exploited points to the very real danger of a growing complacency on both the lenders’ and the borrowers’ parts. In our shared relief at nearing the end of the credit crunch, we run the risk of borrowing and lending ourselves into an even deeper abyss.
Too many of us still find ourselves seeking loans just to meet current expenses or putting daily necessities on our credit cards, while just as many of us are splurging, putting the costs of long-denied pleasures on our cards. And if we don’t rein in these behaviours, and soon, we might actually make the doomsayers’ predictions come to pass.
We can set our financial course a’ right.
The best way for individuals, the UK, and the greater world to avoid an even more severe recurrence of our recent troubles is by recalling the circumstances and not repeating the behaviours that led up to it. For starters:
- Exercise a bit of patience – You’ve suffered for several years. Don’t try to spend away all that suffering in a few months. Think long and hard before making discretionary expenditures, especially if you have to go into debt for them.
- Economise in moderation – Find the least-painful areas where you can economise on your monthly expenses. You needn’t don a hair shirt and deny yourself and your family everything you enjoy, but certainly there are some expenses that you make as much out of habit as out of a quest for enjoyment.
- Trim your mortgage payments – If you have equity in your home, consider refinancing it while interest rates are low.
- Borrow only when it is to your financial benefit – Borrowing to pay an expense that is recurring on a regular basis is like digging yourself out of a hole. If other debts don’t leave enough in your budget to meet recurring expenses, do your best to pay those debts off quickly, or consolidate them into a single payment that is smaller than the sum of those other payments. Sometimes, going into debt to purchase a new appliance, car, or home repair can actually reduce what you are now spending each month on repairs, fuel, and electricity. Work up the numbers before making a decision.
- Educate yourself about the kinds of loans available – A secured loan will generally have a lower interest rate than an unsecured or instalment loan, and significantly lower than a payday loan. Determine what kind of loans are available for your intended purpose, then shop around to find a lender whose rates and terms are best for that type of loan. Be sure to familiarise yourself with the fees and penalties that a prospective lender charges, as these can vary between lenders, and make a significant difference in what you end up paying.
Are We Heading For A New Credit Bubble In The UK?
It would be naïve to suggest that our economy and that of the greater world is sufficiently robust and stable that we will never see another financial crunch like the one that marked the past decade. All the same, it would be overly cynical to bluntly state that we are headed for yet another financial abyss.
The truth, as usual, lies somewhere in between. Just as it is possible for citizens, financial institutions, and governments to repeat past mistakes and drive the pound, dollar, yen and yuan into a state of near-worthlessness, if enough of us learn from and refuse to repeat our past mistakes, we can sustain a healthy global economy.