Is it all about the debt for UK individuals?

One of the issues of the credit crunch era has been the subject of debt. Often it is sovereign debt that is discussed but of course the private-sectors of the world often also piled it up in the pre credit crunch era. This is a factor in the policy response of many central banks who have cut interest-rates sharply and increasingly even into negative territory as a way of cutting the interest or running costs of such debt. A problem with this is that whilst it may provide something of a short-term boost it also encourages the accumulation of yet more debt as incentives for saving are reduced and the cost of credit drops. It provides an incentive for behaviour which is exactly the reverse of the deleveraging which is what central banks claim that they want. Also we have seen that in our increasingly fractured and divided economic world the interest-rate cuts do not directly reach the areas that most need them. An example of this has been the periphery in the Euro area.

The UK

There have been two main additional measures in the UK to reinforce the credit position. First cam some £375 billion of Quantitative Easing by the Bank of England and second the summer of 2012 came its Funding for Lending Scheme which boosted mortgage lending and our banking sector. Today I wish to widen the analysis of its impact and also consider how it has impacted unsecured lending such as personal loans and overdrafts.

Unsecured Borrowing Surges

Price Waterhouse produced a report last week with some numbers which will send a chill down the spine of those familiar with UK economic history.

Britons added nearly £20bn to their total unsecured borrowing during 2014, an increase of nearly 9% on 2013 – the largest percentage rise in more than a decade.

As Karen Carpenter sang so beautifully, such numbers remind me of this.

All my best memories
Come back clearly to me
Some can even make me cry.
Just like before
It’s yesterday once more.

The likely  trends according to PwC are as follows.

Total unsecured borrowing now stands at £239bn, the equivalent of £8,936 per household …. PwC projects unsecured borrowing will grow over the next two years by between 4% and 6% annually. This projected rise would leave the average UK household with unsecured borrowing of close to £10,000 by the end of 2017, taking consumers into uncharted territory in terms of borrowing levels.

That phrase “uncharted territory” in terms of unsecured borrowing sends a sharper chill down the spine. What could go wrong?

One feature of these numbers is the inclusion of student loan debt in the PwC numbers as many versions these days omit it. If we consider the position of student loan debt whilst we hope it is secured on our student’s futures it has no bricks and mortar backing so they do have a  point. Also it is important that we allow for its rise and do not shuffle it down some statistical back-alley as some of the official data tries too. I guess they do not want to record the impact of the rise in tuition fees.

The average student loan value in 2014/15 is £11,710, a jump of more than 35% on last year’s figure.PwC estimates that the typical student who began university post 2012 will graduate with unsecured debt of between £40,000 and £50,000.


Of course this is debt but in some respects not as we know it as it often does not cost anything for a while and there are doubts about how much will ever be repaid but it is debt nonetheless. So we find a new facet of an old problem. It always leaks out somewhere doesn’t it?

Today’s data

If we look at today’s Bank of England data we see that this is one area where it has been able to generate some credit growth.

Consumer credit increased by £0.7 billion in February,compared to the average monthly increase of £0.9 billion over the previous six months.The three-month annualised and twelve month growth rates were 4.9% and 6.6% respectively.

I would not get too hung up on the monthly number as it is an erratic series which is also affected by rounding but an annual growth rate of 6.6% is more than double our rate of economic growth. A more exact breakdown is given below.

Within consumer credit, credit card lending increased by £0.2 billion in February in line with the average monthly increase over the previous six months. Other loans and advances increased by £0.5 billion compared to the average monthly increase of £0.6 billion over the previous six months.

In case you were wondering the total amount of unsecured debt in the UK was £169.1 billion in February according to the Bank of England. Also the range of growth rates goes from a frosty -2.3% in June 2010 to a red-hot 21.5% back in the early part of 1988.

Interest-Rates on Unsecured Debt

This is a story of two halves. So let me start with the sector which has seen a change and that is personal loans. If you were to borrow £10,000 now then the Bank of England has you paying some 4.5% as opposed to the 6.69% of two-years ago so quite a change. So it is no surprise to see more borrowing in this area as I wonder if it is related to this. From the Society of Motor Manufacturers and Traders or SMMT and the emphasis is mine.

The number of new cars registered has risen every month since March 2012, as the UK continues to bounce back from the recession and consumer demand has been driven by exciting new products and attractive finance deals.

Exciting new products sounds rather like the “innovation” of Irish financial products pre credit crunch.

The other half is of interest-rates on credit cards (17.8%) and overdrafts (19.7%) which have been rock solid over the past couple of years. In fact they have moved little at all in the credit crunch era in spite of all the official interest-rate cuts and measures we have seen.

Also there is another factor which is that the range of interest-rates offered these days varies very much with one’s credit rating and I wonder how well the Bank of England data catches this if at all.


There is much to consider in the UK private-sector debt position. You see even the extraordinary push provided by the FLS only managed to push net mortgage lending just into positive territory as shown by the numbers for February.

Gross lending secured on dwellings was £16.2 billion and repayments were £14.5 billion.

I guess the official fear here was a period of net falls in mortgage lending which in another twist to the tale is of course what they have often claimed they want! So the boost to unsecured lending has helped give the economy another nudge forwards for now at least.

Intriguingly however the real surge has come from student loan debt. As the Bank of England data ignores it then I will move to HM Parliament data. At the end of the 2013/14 fiscal year it amounted to £54.3 billion as opposed to the £40.3 billion of 2011/12 and this is what is expected to happen next.

This is expected to grow rapidly over the new few years and the Government expects the value of outstanding loans to reach over £100 billion (2014-15 prices) in 2018 and continue to increase in real terms to around £330 billion (2014-15 prices) by the middle of this century.

For those of you wondering how much we owe as individuals in total the Bank of England calculates it at £1471 billion but it does not include student loans.

In a way this is a ying to Friday’s yang for the UK economy. There we see the positive impact of disinflation boosting the economy whereas today sees something familiar but not so friendly.


15 thoughts on “Is it all about the debt for UK individuals?

  1. Hi Shaun

    To my mind the increase in debt is one of the motors of the UK “economic recovery”, perhaps the major one. Much of this debt effectively brings consumption forward so one asks the question: what happens when people stop borrowing? By definition it has to be a fall off in demand and that may mean recession.

    There has to be a limit to what people can borrow on an unsecured basis, a point beyond which no prudent (or even imprudent)lender will extend credit. We don’t appear to be there yet but we are getting nearer and, at that point I believe the economy will go into reverse. This situation is of course compounded by the insipid growth in wages which sees people struggling more and more and debt is seen as the bridge between reality and aspiration. This is a situation which seems to me to be independent of the level of interest rates ie it is a function of the level of credit extended in the economy in relation to borrowing capacity so it does not require an increase in rates to trigger an economic reverse.

    This no way to run an economy.

    • “There has to be a limit to what people can borrow on an unsecured basis, a point beyond which no prudent (or even imprudent)lender will extend credit.”
      Your memory is short.

    • Hi Bob J

      I think that for once there was something which turned things for the better and it was the oil and commodity price falls which as I discussed on Friday gave the net importers of which we are now one a boost. It is boosting real wages for example especially the bits priced in fuel and similar articles. However once it ends we face the same old problems except of course we run the risk of being weaker when we face them.

    • This is why they keep cutting interest rates, to make the ever burgeoning debt affordable on a monthly payment basis. If they (financial institutions) get near to zero with offered interest rates then they can’t go lower without incurring losses. There are only 2 options then:

      1. Stop lending and the economy collapses.
      2. Send the bill for their losses to the tax payer via the government, sound familiar? Credit Crunch #2.

  2. Hi Shaun.
    If I may take issue with one premise.
    Although savings rates have been obliterated, and the motivation to save similarly, unsecured borrowing rates have not, in general, fallen to the same extent.
    Barclaycard and Tesco bank both offer headline rates of 18.9%, and average credit card rates have CLIMBED by nearly 2% to 20.4% in the past three years, despite BoE rates remaining at 0.5%.

    This is a problem, as wage disinflation has meant that the value of people’s debt has also risen by (on average) 10%, making it still less affordable.

    Both taken together equal a huge squeeze on discretionary spending, and my fear is that TPTB will use this squeeze as “evidence” to support their crackpot “deferred-spending” theories, deliberately creating inflation which further impoverishes us.

    • hello shaun,

      unintended consequences of bailing out the Bankers and the Western Governments?

      seems so

      1930’s asset bubble deflation avoided – tick

      rich 0.1 % protected – tick

      Public unaware – tick

      Golden pension plans for those on the inside – tick

      well paid jobs for the boys – tick

      kan kicked – tick

      Well they have done well ,didn’t they ?


      Pass the popcorn , and to quote Castor from TRON: LEGACY — “This is going to be quite the ride!”.

      • Right on Forbin, I see all the ticks and they are all true. But we do have a fatter elephant peddalling a smaller tricycle on a higher wire. Popcorn will NOT break its fall. 🙂

    • Hi therrawbuzzin and thanks for the link.

      The Bank of England disagrees with the credit card interest-rates but even with their data I agree that they have barely fallen in the credit crunch era. It has been the interest-rates on personal loans which have dropped and I would love to get an exact breakdown of where they go and for example how many car loans there have been.

  3. To me it seems that debt, both public and private, is a problem only if it is used unproductively. That is, for private debt the stream of revenue resulting from it’s investment needs to cover it’s repayment with interest while for public debt, growth and or inflation needs to be enough to at least keep it on a sustainable trajectory.

    The financial crisis was essential caused by a failure in the private sector’s use of credit – the failure culminating in an asset bubble. Public sector debt was largely not a problem at this point, although I suspect that in part this was because of an increased tax take resulting from the private sector bubble. Public sector debt did however become an issue after the crisis because the public sector essentially bailed out the private sector economy via bank bailouts and automatics stabilisers.

    In regards to the above it seems to me that economist and central bankers really need to hang their heads in shame not just at their failure to see the crisis coming but because their policies effectively helped the crisis along. Firstly they didn’t (and still don’t?) recognise the endogenous nature of private sector credit creation and sector their target for managing the creation of credit – essential inflation targeting – didn’t (and doesn’t) properly include the place that that credit largely goes (assets).

    • Hi Dave and welcome to my corner of the blogosphere.

      As to your last point I am 100% in agreement and argued on here in the days of the creation of the debacle known as CPIH (CPI plus owner occupied housing costs) that house prices should be used instead. It is also one of my arguments in favour of RPI as an inflation measure as it has a housing costs section albeit flawed which CPI lacks.

      As to the debt problem then the perception ebbs and flows with the cost which in many areas has dropped due to QE. But then we are likely to borrow more and the same old cycle begins again. On that road interest-rate rises get even harder and we are in a “spiders web” as Trouble from Coldplay puts it. This should be a major issue in the General Election but instead is unlikely to merit a mention 😦

  4. Hi Shaun and thank you for the easy to digest facts.The rise of unsecured loans is always worrying.Things can change rapidly and although good job growth,low inflation and low interest rates are welcome it won’t be like that for ever.

  5. When recently renewing my mortgage, albeit a small one, the bank staff suggested it might be about the same cost to fix the rate with an unsecured loan than a mortgage when you take into account the associated fees etc. They were right; an hour online later and I got to well within a percent of their 3 year fixed! There is also the added benefit that there is no set up fee or early redemption penalty.

    This in itself seems a strange state of affairs. It just seems too cheap when they have no security.

    Today’s tune? ‘It’s all about the base’ (rate)!

    • Now that is interesting and does reflect on the distortion costs associated with all those mortgage affordability and ladled on charges. Are you sure that there no effective draws upon your assets ( in case of bankruptsy) anyway. It could be that small print means your good credit rating and obvious asset ownership makes you a golden borrower anyway?Paul C

  6. Great stuff again Shaun – even though it’s bit scary – though I’m not sure what scares me more; the numbers or central bankers, politicians & creative indices.
    The way things are going total private debt could just keep going up and up; with only the odd recession (the last one was very odd!) to tangle things up in a spider’s web.

    Personally I’ve always been rather uneasy about loans – call me old-fashioned!

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.