Average UK household set to owe £10,000 in unsecured debt by 2016

The average UK household is on track to owe nearly £10,000 in unsecured debt (including personal loans, credit cards and overdrafts) by the end of 2016, according to a report by PricewaterhouseCoopers (PwC).

Last year total outstanding unsecured borrowing increased by 9 percent (almost £20 billion), around £9,000 per household,  reaching an all-time high of £239 billion – surpassing, in cash terms, its pre-financial crisis peak.

PwC believes that if the trend continues then the average British household is on course to owe around £10,000 in unsecured debt by next year.

In the PwC report, titled ‘Precious Plastic: How Britons Fell Back In Love With Borrowing’, the accounting firm warns that as more people become confident about borrowing the affordability of this piling debt could become a major concern.

“While most Britons are currently in control of their borrowing, and in their ability to remain so, there could be challenges ahead”

“This increase, coupled with UK households’ vulnerability to interest rises, could leave households overstretched,” the authors of the report said.

 

Low interest rates and low inflation are expected to continue for some time. However, as PwC points out, if there were a 2 percentage point rise in interest rates charged on household debt the cost would be another £1,000 a year.

Simon Westcott, a director in PwC’s financial services practice, commented:

“Underlying this significant growth in overall unsecured borrowing, we also saw changes in the way people borrow. Old favourites such as credit cards are staging something of a revival, while newer forms of borrowing such as peer-to-peer lending are starting to gain ground

“Despite our survey revealing a relatively high degree of confidence among consumers about their ability to stay on top of their debts, affordability of the UK’s household debt pile may come under pressure in the coming years.

“As the total household debt to income ratio heads towards 172% – exceeding its previous peak in the run up to the financial crisis – and interest rates increase, consumers could begin to feel squeezed once again. This could undermine growth for lenders and feed through to resurgence in bad debt.”

Abad debt is money owed that clearly will not be paid back.

A survey of approximately 2,000 people in the UK revealed that just 18% are worried about how they will make future repayments – down from 26% in 2013.

However, many people in the UK don’t fully understand the “true cost of debt”. When presented with various different options, only 21% correctly estimated the cost of a mortgage.

This low level of financial literacy could result in people taking on higher amounts of debt without properly understanding the true cost.

Simon Westcott, a director in PwC’s financial services practice, concluded:

“With unsecured borrowing showing strong growth, bad debt levels receding to pre-crisis lows and funding costs remaining relatively low, credit card issuers are seeing strong margins and profits.

“However, the credit card industry faces a number of challenges in the coming years – including a potential resurgence in bad debt, regulatory scrutiny of their business model, and reduced appeal to younger borrowers. They should seize this opportunity to innovate and reinvent themselves from their current position of strength.

“Credit card issuers also face regulatory scrutiny over the potential reverse “Robin Hood” cross subsidy that may exist in the product, where in the absence of annual fees, a relative minority of customers who regularly pay interest – perhaps those with less means and / or financial literacy – enable the rest to enjoy the benefits of a credit card for low or no cost.

“While it may not feel like a positive step to many consumers, the reintroduction of annual fees – common in many other markets – would be good for both credit card issuers and customers alike because it would simultaneously help to address the cross subsidy question and also diversify issuer’s sources of revenue, leaving them more resilient to changes in the economic cycle.”