Debt Crisis - What Crisis?

According to a recent survey by the Alliance and Leicester, the UK is not heading for a debt crisis even though debt levels have trebled in the last 15 years.

Last year, the total UK consumer debt reached just short of 1.2 trillion, which is three times what it was in 1990, and broadly equivalent to the size of our

annual economic output. Since 1990, mortgage debt has trebled to 967 billion, the amount we owe in unsecured loans has risen fourfold to 135 billion, and credit card borrowing has gone up an astonishing seven times to 58 billion. That means that each household in the UK owes on average nearly 84,000, with mortgages included.

According to the report though, interest rates would have to double to around 9% in order to realise the debt crisis seen during the last recession of the 1990s. During that period, interest rates averaged around 15%, compared with 4.5% today, and average household income was half what it is now. Back then the average household had to spend 25% of its income servicing interest on debts (including mortgages), whereas today an average of 14% goes on debt servicing.

Although personal bankruptcies are at an all time high, these are mostly due to people with large amounts of unsecured borrowing, and not homeowners. In fact, mortgage arrears and repossessions are at an all time low, and the Alliance and Leicester argue that most people will be comfortable with high debt levels as long as interest rates remain low.

With regard to unsecured borrowing, the situation is more serious. People living in rented accommodation are paying the highest proportion of their income on unsecured loans, spending 40% of their income on debts that average at around 8,000, which is double the UK average. The majority of this group are below 30,and most of their borrowing is due to student loans, rather than credit card debt.

Diana Middleton writes on matters relating to debt advice in the UK, and especially debt problems. She is particularly interested in personal finance, writing on best approaches to getting a secured loan, and the background issues relating to debt consolidation.

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