Socialist Worker

Ticking debt ‘time bomb’ may blast holes in weak recovery

by Sarah Bates
Issue No. 2573

Around 50 percent of 18 to 30 year olds rely on payday loans to make ends meet

Around 50 percent of 18 to 30 year olds rely on payday loans to make ends meet (Pic: geograph.org.uk)


Some 51 percent of women and 45 percent of men aged 18 to 30 have to borrow money to make it through to the end of the month.

Debt charities say almost nine million individuals use credit for essential household bills.

These shocking statistics come as the Bank of England warned last week that Britain’s “debt time bomb” is heading for an explosion.

Personal debt has now reached £200 billion, mostly on credit cards, personal loans and car deals.

Consumer debt has been growing for almost ten years and is almost as high as the level of personal debt in 2007—just before the crash. Household savings plummeted to record low levels at the end of last year.

The Bank of England recently hinted it may raise interest rates, which could leave millions of households struggling to make repayments on mortgages and loans.

Interest rates have been held at an unprecedented low rate for a decade since July 2007.

Revive

After the banking crisis, interest rates were kept low to funnel money to businesses. In addition it was hoped people would borrow money, spend it and revive demand.

For a while banks were nervous about whether borrowers could repay.

But more recently, in pursuit of profits, banks and other lenders have been extending “easy” lines of credit, such as payday loans and car hire purchase schemes.

Lenders are encouraging people to borrow—and often not bothering to check if they can pay the loans back.

Low wages and the growth of zero hour contracts mean that more people are having to rely on credit for basics.

That has led to the explosion in people using short term loan companies over the last decade.

One in four parents have used payday loan companies.

Access

These firms target people who can’t access bank loans or more “traditional” forms of credit. They can approve loans of as much as £1,000 to people in a matter of minutes.

Their business models are based on customers paying back several times the amount they borrowed through annual interest rates in the hundreds of percent.

The astronomical interest rates drive people further into the cycle of debt.

But availability of credit is not the only factor that affects levels of consumer debt in Britain.

The growth of credit is linked to a decade of falling wages and rising living costs. This has seen people using credit to pay rent or buy household goods such as washing machines or cookers.

If interest levels rise, lots of people in debt could have trouble repaying loans. They could lose their houses, their cars and find it even harder to make ends meet.


Car finance firms often don’t care if you can’t pay loans back

Car finance firms often don’t care if you can’t pay loans back (Pic: NickyTCW/Wikicommons)


Car finance schemes drive the rise in dodgy credit

The way people are buying cars has changed. Ten years ago most new cars were bought either with cash or a loan from a bank.

Since the financial crash car companies have presented options for people that seem more affordable.

Some 86 percent of cars are now bought using credit. Personal contract plans (PCPs) are one of the most common.

These car finance schemes are the fastest growing part of consumer credit. Around 75 percent of growth in consumer credit from 2012 has come from car finance.

Lending for these contracts is big business—it’s valued at a record £58 billion and looks set to grow.

A PCP is a hire purchase agreement.

But instead of buying a car outright through instalments, people simply pay for the amount the car depreciates over a fixed term. They put down a deposit then pay a monthly amount.

At the end of the period the customer can make a further payment, often several thousand pounds, to buy the car or leave the PCP and give the car back.

Companies are lying when they say that a PCP is similar to taking out a phone contract.

The financial implications are much greater.

Some people have also complained of being hit with unexpected bills at the end of the contract.

The Financial Services Authority is currently investigating if PCP deals have been sold to people who can’t afford them.


Another crash on the horizon?

The crash of 2007 was the biggest recession since the Second World War.

There are now fears about a further recession.

After a decade of austerity and billions spent bailing out the banks, there has not been a significant recovery.

Companies are still saddled with bad debt, and individuals have been racking up more and more consumer debt.

The problem shows no sign of slowing down, with household debt growing by 10 percent in the past year.

Economic growth was 1.6 percent last year.

Because growth is so sluggish, an increase in interest rates could have a massive impact on business.

The crash exposed how volatile the system is.

Europe’s banking sector still has massive debts and would not be able to absorb a crash of a similar magnitude.

The crash of a decade ago was not an isolated aberration, but part of an unstable system that cannot regulate itself out of problems.


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