In a hall in East London, people gather to share their stories of debt. They’re part of a “debtors’ hearing”, in which people can discuss their debts with others, run by a group of organisations including the New Economics Foundation.
Each tale is painful and unique, but the issues and trends similar. One woman recounts how her debts – incurred by her former husband – have stolen from her any sense of optimism. She feels imprisoned. Another says debt-triggered depression now keeps her from work, further intensifying the situation she’s in.
New research from the Young Women’s Trust underlines these individual stories. One in four young women today say they are in debt all the time. One in ten young parents report using a food bank when they can’t afford to buy food. And strikingly, more than half of young women say they feel worried for the future – a sharp increase from 38 per cent in 2015.
The problem is particularly stark for women because of the pay gap that persist between them and men. Low pay, unaffordable childcare and high housing costs – and now rising food costs – combine in a particularly toxic mix that often falls on the shoulders of young women. Caught in this position, people borrow to make ends meet.
The results are felt psychologically as well as economically, but it is not only households that are at risk. The UK economy is precariously balanced on a mountain of household debt, which risks undermining growth.
In 2016, UK personal debt hit £236.5bn, exceeding the pre-crisis peak of 2008 by 4.6 per cent. Personal debt includes all unsecured debt such as credit cards, rent to own, car finance, home credit, bank and payday loans, and overdrafts. There is concern among experts that it may be becoming the new ‘sub-prime’ debt, like mortgages in the lead up to the financial crisis. The figure of £236bn includes both consumer credit debt reported by the Bank of England for UK Financial Institutions, and credit advanced by international lenders operating in the UK which is reported separately by the Office for National Statistics. As a result it exceeds the £200bn regularly reported in the media, which is based only on the Bank of England statistics.
An estimated 7.6 million people in the UK are now spending more than a quarter of their income on debt payments. Millions of credit card users are paying an average of £2.50 in interest and charges for every £1 borrowed, eventually paying 350 per cent of the value of the original loan back to banks and credit card providers.
For a decade now, people’s debt – and the misery it causes – has been used to prop up economic growth. Since 2015, household consumption has been responsible for between 50 per cent and 100 per cent of annual GDP growth. And in the same period, wages have been falling in real terms, leaving families on low-to-middle incomes little choice but to use prolific easy credit to pay bills and put food on the table.
Low wage-high debt households have benefited lenders, which have taken advantage of the demand for credit and, despite some improvements, a still ineffective regulatory environment in order to charge high interest rates to people who are struggling to make ends meet.
The effects have been profound on the people directly involved, but growing consumer debt – easy but very expensive – is a problem for us all.
As levels of personal debt grow, aggregate demand in the economy will fall – people will stop buying as many things so that they can pay off their debt. When people stop spending and borrowing, business revenues will fall and they will stop hiring people, at which point the economy will fall into recession.
While some predict that the UK is on its way to another crash, it is equally possible that a less dramatic – but just as damaging – economic slowdown caused by household debt intensifies, with those on the lowest incomes suffering most.
To end people’s misery and lower the economic risk, action on three levels is needed.
First the regulation of lenders needs to be tougher. Credit is now capped on payday loans and this needs to be extended by the FCA to other forms of personal debt to make sure people don’t end up paying more in interest than the original value of the loan
Second, some of the debt of households will never be repaid, will always be a burden for them and a constraint on growth. At some stage, government and financiers will have to bite the bullet and cancel it.
Those that gathered in East London and those surveyed in the Young Women’s Trust report, need something else. So third, people in debt need places to come together, share their stories, take action together and put pressure on regulators and government.
Anyone who has lived with multiple credit cards, payday loans and the fear of bailiffs knocking at the door know how corrosive debt can be. Interest repayments exacerbate poverty and deprivation and have profound effects on mental health and wellbeing.
As one debtor told the New Economics Foundation, “As debt increases and you lose control you become depressed and anxious. The lack of a way out affects your mood, creates psychological problems.”
Ending the downward spiral of household debt matters most to those caught in its midst. But for the sake of our economy, we should all be on side of debtors.
Annie Quick leads on Inequality & Wellbeing for the New Economics Foundation