Borrowing is up but are we more financially savvy than ever?

Latest Bank of England figures show that the amount UK consumers owe on loans and credit cards grew to £1.9billion in March 2016. This is the highest figure in 11 years, and seems to be driven by a sharp increase in borrowing on plastic. Credit card borrowing increased by £635 million over the month, compared to an average £400 million over the previous six months.

Unsecured loan and use of overdraft facilities rose by a total of £1.2billion over the same period, up from an average on £1 billion. The growth rate during the month was 9.7%, whilst overall comparing the last three months of 2015 to 2016, there is an overall 11.6% growth in unsecured borrowing.  Overall, unsecured lending has continued to rise for the past 13 months and is at its highest since March 2005.  Peoples’ appetite to borrow therefore has not diminished, but are people now borrowing more responsibly, and using all the tools available from lenders to ensure that they are more financially savvy?  Or are we still borrowing beyond our means?

The latest figures reported by the Insolvency Service show a 0.3% increase in personal insolvencies, in the first quarter of 2016, with some 20,383 people in England and Wales now declared as insolvent. The head of Policy at Stepchange Peter Tutton said that “Slow wage growth and the rise in insecure jobs have left millions of households financially vulnerable and we have already seen an increase in the number of people coming to us for debt advice in 2016. If consumer credit continues to rise quickly, it risks increasing the vulnerability of households who are already struggling to make ends meet. Creditors must ensure they carry out thorough affordability checks and lend responsibly to ensure that previous mistakes are not repeated.”

In recent months, there has been somewhat of a price war with the introduction of the lowest ever unsecured loans rates, the longest ever 0% borrowing on credit cards and fee free ‘money transfers’ from credit cards direct to the borrowers bank account.  Indeed there is now a 40month interest free period on certain credit cards, so they lenders are really trying, and it seems new and different offers are out every week.  However, personal loan rates have fallen to record lows and with Easter falling in March, retail sales were also down.

Money expert at the comparison website Tashema Jackson noted that: “While rock-bottom interest rates have helped consumers get great introductory offers and low mortgage rates, it also means the temptation to borrow beyond our means has seldom been higher.”

Howard Archer at Global Insight claimed that increased consumer willingness to borrow was likely to have been fuelled by recovering confidence and low interest rates, and that household debt levels were down from the peaks seen in 2009, thus it seems borrowing may be up but people are managing it better.  “Nevertheless, it is important that consumers do not become increasingly tempted to take on excessive debt and also that bank lending standards do not slip,” he warned.  He commented further; “In considering borrowing, consumers need to allow for the fact that interest rates will eventually rise (unlikely in 2016), even if the increases are likely to be gradual and limited compared to past norms.”

Furthermore, The Insolvency Service figures show that despite an increase at the start of the year, the overall number of personal insolvencies was down by 2.2% compared to the first quarter of 2015. Indeed the changes made to Debt Relief Orders (DRO), which now allows those with £20,000 to enter insolvency led to the direct increase in 2016. There were 6,722 DROs in the first quarter of 2016, a 3.4% increase compared with the final three months of 2015 and 8.2% higher than the previous year. Before October 2015, DROs were only available to those with debts of £15,000, and around a quarter of DROs in 2016 have involved qualifying debts much greater than that figure.

The Chief Executive of the Money Advice Trust Joanna Elson, indeed commented: “For once, this slight rise in insolvencies isn’t all bad news, as these figures confirm that recent changes to debt relief orders are working, helping thousands of additional people who previously had no way of resolving their financial difficulty.”

She noted however, that there was a need for a complete review of the options available to people struggling with debt and that; “we have to make sure that anyone, in any situation, can access an option that can help them resolve their financial difficulty, and that no one is allowed to fall through the cracks of a system that has evolved organically over several decades”

Thus it seems therefore that borrowing and the consumer desire for it is greater than ever, yet with a greater and increased choice of products and services within our financial sector, it seems that people are getting better at managing their borrowing.