Household debt is on the rise as stagnant wages and an increase in living costs put the squeeze on living standards. Research from the Trade Union Congress (TUC), a federation of trade unions in England and Wales, has found that the average secured debt per household stood at £13,200 last year, which is just £100 short of the levels it reached before the financial crisis.
The TUC has warned that unless the government takes action to boost pay, the number of people being forced to borrow to top up their wages will soon reach crisis levels. It predicts that average household debt will reach £13,900 by the end of 2018 and could top £15,000 before the end of the next parliament.
The Surge in Household Debt
The alarm at the steady rise of unsecured debt, which excludes mortgages, is the result of a “lost decade” of wage rises, with wages, in real-terms, now worth £20 a week less than they were in 2007. Credit cards and payday loans have long been used to prop up household spending, but now personal loans are increasingly being used to prevent households from running on empty.
Personal loans are now available from banks, building societies, and even personal loan lenders like Wonga have expanded their product range to cater to the new nature of borrowing demands. The online loan giant now offers the option for borrowers to access emergency cash for as long as a 6 month period (though this is South Africa only, the UK version of the brand remains as dead as the dodo). The larger mainstream lenders (i.e. the big banks) offer loans which are repayable over anything starting from six months up to five years with some of the major banks. However, while they’re cheaper than shorter-term options like payday loans, they are not a product that should be used for anything other than essential items. Using personal loans to top up a shortfall in wages is simply not sustainable over the longer term.
Living Costs Continue to Rise
While wages across many sectors remain stagnant, living costs continue to rise. There was a brief period in 2015 and 2016 when low inflation led to a small boost in living standards, but now the rate of inflation has reached 3.1 percent, while wages are rising by just over 2 percent a year. That is leaving millions of families running on empty.
The financial pressure this is putting on many households is evidenced by the 313,719 county court judgements (CCJs) issued against consumers in the third quarter of 2017. That represents a rise of 24 percent when compared to the same period in 2016.
What Does the Personal Debt Consist Of?
The high level of household debt is made up of borrowing on store cards, credit cards, payday loans, student loans, and car loans. Two of the most significant factors in the growth of unsecured debt has been the increasing use of car loans and the growing level of student debt.
Money that is spent on servicing these debts every month is leading to weaker demand and spending, which is affecting the wider economy. This is particularly the case in parts of the UK where well-paid jobs are in short supply. Unless these areas receive significant investment in training, transport links, and housing then the current reliance on debt will only get worse.