Factors_Affecting_Total_Levels_of_Uk_Unsecured_Debt_1993-2011

Factors affecting total levels of UK unsecured debt 1993-2011 Total personal debt in the UK has tripled between 1993 and 2010, from a figure of £400bn to £1.46 trillion (Bank of England, 2010a). Although around 85% of this figure, £1.24 trillion is secured debt against property, the amount of UK household unsecured debt, not back by any asset, has also seen massive growth and change during this period. Figure 1 (source, Bank of England) is a graph representing this rapid change. The graph gives the 1993 figure of household unsecured debt as £50 billion. The next five years to 1998 show it doubling to £100 billion, and then continuing to rapidly increase to a peak of £240 billion in 2008. The graph also shows a plateau from 2005 at £210 billion till 2007 before a surge to its peak in 2008. The level then declines almost back to its 2007 level by mid 2010. What factors could have accounted for these changes' Let’s examine each in turn, beginning with the rapid rise through the 1990’s and 2000’s. In the mid 1990’s, employment was low, average earnings were growing steadily and interest rates were lower than those in the 1970’s and 80’s. This gave people more scope to take on debts. The 1990’s and early 2000’s saw the continued growth of the consumer society, with a greater emphasis on buying, and spending almost being seen as a leisure activity. Attitudes were changing with earlier notions of financial prudence being replaced by a different approach to spending and indebtedness, the ‘buy now, pay later’ culture emerged. There was a greater acceptability of debt with less social stigma attached and a greater peer pressure to ‘have it all now’, rather than save up for products. These social pressures on consumption (symbolic consumption Chapter 3) arguably encouraged people to take on debts to finances aspects of a sought after lifestyle. You could even argue that government policy today can be seen to encourage personal indebtedness e.g., with growing university fees. Another factor was that the liberalisation of the financial services markets that began in the 1980’s with government policy to increase competition and encourage free markets has continued. There was a huge growth in the number of different ways of borrowing money, with increasing numbers and types of lenders, Technology in banking and retailing was advancing rapidly and the way society handled money had changed completely with the launch of plastic cards, with credit and store cards providing ready access to debt. Where previously there had been restrictions imposed on lenders by government policy which limited their activities, they were now free to market their products aggressively. Advertising increased the pressure to buy financial products, e.g., credit card companies massive mailing campaign, usually unsolicited, giving households inducements to ‘buy’ e.g., with great ‘initial’ rates, all leading to more spending by households on debt. In 2004 spending on plastic overtook cash and by 2010 there were more credit and charge cards than people in the UK, 71.3 million compared with around 60 million (Credit Action,2010b). As mentioned, the level of unsecured debt began to plateau in mid 2005, even beginning to fall very slightly before rising again prior to the onset of the recession in 2008. Why' One of the reasons may be that rising house prices in the late 90’s and 2000’s had seen an increase in the level of equity people had in their homes. Many householders sought to access this additional equity by increasing the size of their mortgages and then using the resulting funds to increase spending in other areas (Del-Rio and Young, 2005), effectively replacing more expensive unsecured debt with cheaper secured debt. Figure 1 shows the level of unsecured personal debt peaking in 2008 at £240 billion before declining at a steady rate. The level of unsecured lending to individuals at the end of December 2010 was £214 billion (Credit Action, 2010a). So what factors contributed to this decline' 2007 saw the onset of economic recession, beginning with the financial crisis that caused a near collapse of the banking industry. As a result, banks were forced to reduce lending severely; borrowing became more difficult for everyone which in turn caused a downturn in the economy. The economic crisis left many people fearing unemployment and debt began to feel more of a burden for some families. House prices also began to fall back. All of this caused householders to rethink their debt position and the crisis in the economy led to many feeling it was more prudent to consolidate their financial position and pay back loans or save more rather than take on new debt. Household costs were rising as a result of changes in the economy; - the cost of food, consumer goods, households bills and fuel prices, all rising. Together with this, earnings were failing to rise in line with inflation so available income to finance any unsecured credit was reducing, another factor. Looking ahead as to what will happen next to levels of unsecured credit, the future remains uncertain. Elevated levels of unemployment, weak earnings growth and restricted credit availability still pose a problem for some households leaving them with limited appetite for additional credit. However, since the availability of credit for personal consumptions drives the economy, a decline in consumer credit can be seen as a drag on economic growth. This is an ongoing issue for the government today, and society as a whole.