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MSE’s Academy of Money
MSE’s Academy of Money

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1 The boom of borrowing in the UK

There are many forms of borrowing – including credit card debt, overdrafts, loans, student loans and mortgages.

Borrowing can be used to finance everything from day-to-day spending, to holidays and to items you use over several years, such as furniture, cars, property and home improvements.

The image is a photo of a young couple in their home in discussions with their (female) financial adviser. The couple are reviewing financial planning documents provided by the adviser.
Figure 1 Most people borrow money at various stages of their life

Since 1993 in the UK, the aggregate (total) value of personal debt has risen over 3.5 times to a total of £1.8 trillion. The majority – c. 85% – is secured debt (like mortgages). This is money lent against the security of property or other assets. The lenders can take possession of these assets if the borrower fails to repay the money. So, it is the lender rather than the borrower who can benefit from a debt being secured. The rest is unsecured debt (like overdrafts) where the lender has no direct recourse to a borrower’s possessions – like their house – in the event of failure to repay. This is usually more expensive than secured debt.

This debt total grew quickly in the 1990s and until the late 2000s. The financial crisis of 2007/8 and the subsequent recession in the UK economy brought this period of fast growth in debt to an abrupt end with lenders – the banks and building societies – adopting a more cautious approach to lending money. Additionally, the financial services regulator, the Financial Conduct Authority (FCA), has introduced tighter regulations on the lending practices of financial institutions. Recent years have, though, seen renewed growth in personal debt – particularly unsecured debt.

Activity 1 Why has personal debt in the UK risen so much?

Timing: Allow approximately 5 minutes for this activity

Can you think of any factors that have contributed to the huge rise in personal debt in recent decades? If you can come up with more than one factor, which one do you think has had the greatest impact?

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There are several reasons, although economists will disagree with each other as to the key reason.

One factor has been the fast rise in house prices over the same period. Most lending is via mortgages to buy property. With prices rising, people need to borrow more.

Yet what has arguably fuelled the growth in mortgages and other forms of debt is laxer lending standards, particularly in the early 2000s before the financial crisis that began in 2007/8. Some mortgage lenders allowed people to borrow 125% of a property’s value, for instance, back then.

Credit cards and loans were also arguably handed out readily to some people who could not afford them.

Other factors have been influential such as growing incomes (at least until 2007/8) that have helped make borrowing affordable, as has the low levels of interest rates seen in the UK from the 2000s.