1 Debt
Of all the aspects of household finances debt has, in recent years, been the most controversial and widely talked about. Personal debt has become a part of everyday life and, as a result, discussions about it regularly make the headlines. Even the Archbishop of Canterbury has made public statements about the level of personal indebtedness in the UK (The Times, 2008)! Debt is regularly featured in the media with stories about how much people have borrowed, how a proportion of borrowers encounter difficulties in making repayments, and how extortionate rates of interest are charged on some forms of debt.
In 2010, the amount of personal debt owed by UK citizens exceeded the staggering figure of £1.46 trillion (Bank of England, 2010a). This total had increased threefold from the level in 1995 – although the growth of debt stalled during the financial crisis that began in 2007. As Box 1 highlights, 2007 proved to be a pivotal year for personal debt. In the preceding years, the growth in personal debt helped to fuel a consumer boom and a rapid rise in house prices. After 2007, the economy moved into recession and house prices fell as the volume of new lending contracted.
Box 1 The financial crisis
Emanating from the global financial crisis that began in 2007, the phrase ‘credit crunch’ entered the media in 2007 and has subsequently been virtually ever-present in discussions about personal borrowing. During this period banks found it difficult to raise funds from the financial markets to support their lending business. This difficulty arose due to concerns about the solvency of many banks – concerns that ultimately were borne out when the US investment bank Lehman Brothers collapsed in September 2008 and later when governments were forced to rescue several banks around the world. In the UK, both the Royal Bank of Scotland (RBS) and Lloyds Banking Group – after it had acquired the near-insolvent Halifax Bank of Scotland (HBOS) – were provided with billions of pounds of financial support and consequently became owned by taxpayers. Under these circumstances the banks chose to cut the amount of lending with the result that households and businesses found it increasingly difficult to obtain loans. High salaries and large bonuses, however, remained. Unsurprisingly, the financial crisis resulted in stalling the growth of personal debt. For example, between 2007 and 2009 the growth in total personal debt virtually came to a halt.
Everyone who has a mortgage, a personal loan or who owes money on a credit card contributes to this total of personal debt – although the greatest proportion by far relates to mortgage debt.
This course explores several of the issues relating to personal debt in detail. Section 2 looks at the evidence on the level and distribution of personal debt in the UK – including the factors that resulted in the rapid expansion of debt until the late 2000s. Section 2 also examines the changing social and economic context and how this has impacted on personal debt levels. Section 3 explores the costs of having debt, and Section 4 considers the relationship between debt and household finances. Finally, Section 5 investigates the process of borrowing, and explains why the gathering of information and making informed decisions about taking on debt is an important part of financial capability.