2006 debts reach highest ever levels in the UK

UK debt levels reached an all time high of £1,268 billion in 2006, a staggering 217% increase from £400 million 13 years ago.

Nearly 10% of the population is showing signs of financial stress according to reports from the consumer credit group Credit Action with research from uSwitch.com highlighting the dire debt situation facing some consumers. In the past year, Citizens Advice has helped manage1.4 million debt problems. This equates to 5,300 people a day seeking advice on debt, up 11% on the previous 12 months and double level of help provided eight years ago.

An investigation by uSwitch.com, the online comparison website, earlier this year revealed that 64% of those taking out consolidation loans did not close other lines of credit and actually went on to spend an average of £2,300 in addition to the newly granted loan amount. These reports demonstrate the overwhelming need for clever financial planning as it can help households save more than £160 per year in interest.

For example, a consumer with average household debt of £4,286 including an average of £1,227 on a credit card, £2,658 on a loan and an overdraft balance of £401 could end up paying £296 in interest alone over 12 months. However, by repaying the debt immediately with a low rate loan (such as Northern Rock offering 5.8%APR) and then repaying the full loan back over a year, a customer would pay £133 in interest - a saving of £163.

The research also revealed that providers are doing little to stem the problem. Of the 763,000 debt consolidation loans issued, 91% of consumers were not asked to prove that other forms of credit had been closed with the proceeds of the consolidation loan. In addition, even basic procedures to verify the financial circumstances of prospective borrowers are failing, with 83% of loan applicants saying that they were not asked for proof of monthly outgoings – equivalent to 1.9 million loans.

Nick White, Director of Personal Finance uSwitch.com, comments: “With Britain’s personal debt levels increasing by £1 million every four minutes, it is clear that consumers need to take some personal responsibility and carefully manage their own financial situation. One person falls victim to insolvency every minute of theworking day - this is a 66% increase on the same quarter last year.

“These statistics highlight the need to educate consumers about effective debt management. Even those who try to be responsible are not closing their debts. In fact, our research shows that these people choose to ignore the problem and continuing to spend regardless.

“Consumers need to understand that taking out a loan isn’t just a quick fix solution to their debt problems. Those who consolidate all their debt into a single loan should only borrow enough to cover all their debts and no more. Nearly one in five consumers we surveyed admitted to taking out a higher loan than needed, with 40% of them doing so in order to have a bit extra for a rainy day.

“If consumers are careful about managing their spending, a debt consolidation loan can help to reduce monthly payments, improve credit ratings and is a disciplined way to overcome debt. It can also help to settle borrowings earlier as the repayments are fixed and set for number of years. Those planning to take out a loan out should act now as there are some excellent rates on offer in the market including Northern Rock (5.8% APR).

“In recent months we have seen rates creeping back up above the 6% mark and it is unlikely that those providers who are still below this can maintain it for much longer given the impending announcement regarding the investigation into payment protection insurance.”

White concludes: “These trends highlight the need for basic money education for all and the Government’s decision to educate young people on personal finance matters is step in the right direction. Ultimately, people must take responsibility for their own finances but the Government has a duty to ensure consumers receive the right information, understand the choices open to them and are empowered to make good decisions, whilst being aware of the consequences if they don’t manage their money effectively.

“If the Government is serious about tackling the £1,268 billion mountain of debt it must take immediate action to equip people with the right tools to make the right decisions.”