This piece was originally posted in the Daily Mail on the second of January 2015.
Today you’ll hear groans from payday loan companies as a cap is introduced on the cost of credit. Britain’s legal loan sharks claim they have cleaned up their act. The Government say they are getting tough with these firms. Mainstream lenders champion their responsible behaviour in contrast. Yet still the public drowns in bills, with little respite in sight. It’s time to wake up to our looming national personal debt crisis.
This week research was published, to little comment, showing our personal debt has doubled in the last year. We are now so accustomed to borrowing for everyday items such as food, rent and travel that news of the gaping hole in family finances makes our shoulders simply shrug.
It is an inconvenient truth that for many years it has mattered more to short term economic gain to encourage easy access to credit, than endure the long term pain required to tackle our spending habits. With estimates that nine million are already in over their heads, and possible interest rate rises on the way, Britain can no longer afford to ignore the consequences for our economy and our country. Much of this debt is on credit cards. Six months ago the average credit card balance was £1,700 – it’s now nearly £3,000.
Families aren’t just juggling cards to cover basic costs. They also now owe twice as much on personal loans. Amounts outstanding to payday lenders have more than tripled. With low wages and erratic inflation, credit has become an inevitable necessity. R3, the insolvency professionals, claim the average indebted British adult owes the equivalent of three months’ salary. Every single day we pay out £163m alone on interest repayments on debt – the equivalent of paying for 5,000 nurses. Little wonder one in five of us expects to struggle more financially in 2015 than 2014.
Given the level of personal debt Britain has and its impact – not just on our economy but our family lives too – this should be a top political priority. Yet the Government’s deafening silence shows how this willingness to take on debt can be seen by some as an opportunity. Office of Budget Responsibility figures predict new borrowing will take total household debt to £2.6trillion by the end of the decade, but our incomes will rise by only £266billion. Without action, the gap between what we earn and what we owe will reach a record high by 2020.
For George Osborne’s plans for reducing public debt, this rising private debt is crucial to stimulating our sluggish economy. Without such consumer spending our recovery is at risk; with it our personal finances will become even more hazardous. Either way, we will all pay the price of the Chancellor’s choices.
Today’s cap on credit must be lowered to have real bite. That the cap is £1 below what legal loan sharks currently charge, and also allows companies to make money from default payments, means it will do little to tackle their predatory behaviour. Many legal loan sharks are already ahead of these rules, offering products designed to evade the cap all together but still squeeze people trying to make ends meet. But payday lenders are just one component of Britain’s credit industry that benefits from encouraging unsustainable levels of debt. Banks, credit and store card companies cannot claim the moral high ground as to who is feeding our unhealthy credit habits.
For too long irresponsible lending has gone unchallenged, with the highest rates and anti-competitive practices often targeted at the poorest borrowers. In this unfair market many borrow to stay solvent, only to find themselves trapped in a debt they will likely never escape.
Today’s cap is at best the start, not the solution, to giving British consumers the protection they need to be able to make ends meet. Reform of our banks must be matched with reform of our consumer credit industry.
We need to tackle those who exploit families on the tightest budgets and extend access to affordable alternatives. Without making overhauling our national credit habits a priority Britain won’t just be broke in 2015. It will perpetually be in the red, struggling to ever get back into black.