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How much should we be worried about the UK’s £1.5 trillion personal debt burden?

The latest figures show that the total personal debt in this country has now reached £1.5 trillion. This huge figure certainly gives cause for thought particularly in the light of expectations that interest rates will start to rise in the coming years to combat the expected further rise in price inflation.

But whilst there are good reasons for be concerned about personal debt in this country there are also reasons to take a considered view of household indebtedness.

To begin with some 87% of the total of debt relates to mortgages, where clearly there are property assets that are set against the debt liability. For those buying their homes interest rates on mortgages are currently so low that for most households monthly mortgage payments are lower than the rentals on rented properties.

Additionally, whilst personal debt has been rising again in recent years the pace of growth has been very modest compared with the boom in debt in the late 1990s and in the 2000s. Personal debt tripled between 1997 and 2007 until the 2007/08 financial crisis stalled its growth. Indeed the total of personal debt has only risen from £1.4bn to £1.5bn since 2008.

Perhaps the reasons to be concerned should focus on the growth of unsecured debt – like bank loans and credit card borrowing. Here the growth in debt has been fast in the past two years and is running at 7.4% per annum. It is this aspect of the growth in personal debt that the Bank of England is currently most worried about. On average UK adults owe £3737 in loans and credit card debt, according to figures compiled by Money Charity. Certainly borrowing via a credit card is usually an expensive way to raise finance and really should be avoided.

There is the risk, too, that increasingly people see borrowing as an alternative to savings, with debt being used in emergencies (e.g. to finance car repairs and the replacement of household ‘white goods’). The low levels of savings in this country are a major concern and provide evidence that people are not planning adequately for their financial future.

So whilst there are reasons not to panic about the mountain of personal debt there are certainly good reasons for people to examine their debt ‘portfolios’. Managing down debts - or at least replacing expensive debt with cheaper forms of borrowing - should be addressed with urgency before we move back into a period of rising interest rates.

Martin Upton

Director of the True Potential Centre for the Public Understanding of Finance (True Potential PUFin)

7th November 2016

The establishment and activities of the Open University’s True Potential Centre for the Public Understanding of Finance have been made possible thanks to the generous support of True Potential LLP. True Potential has committed to a five-year programme of financial support for the Centre. Views expressed by True Potential PUFin may not reflect those of True Potential LLP.

This blog was also posted to Personal Finance Today and Investor Today

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