Rising Interest Rates and the Affordability of Debt

French Duncan


 

Household debt is at its highest level since the 2008 financial crisis. The amount of debt owed on car financing, personal loans and credit cards is estimated to be more than £200bn. Add to this the drop in currency value since the EU referendum and the recent interest rate hike from 0,25% to 0,5%, and British households are facing an increase in their cost of living. Though this initial rise in interest rates may not seem all that significant, the expectation is that rates will be raised at least twice more before 2020. 

Can British households afford their debt?
A recent survey by insolvency trade body R3 and ComRes found that over 30% of British adults would struggle to afford a 1% rise in interest rates. 

This comes at a time when many households are already living on very fine economic margins and credit is not limited to luxury purchases, but rather a requirement that makes it possible for people to pay for necessities like a home, a car to get to work in or even basics like food. The dangers of the debt created in this manner is masked by the cheap credit that has been available. According to Mark Sands, R3’s personal insolvency committee chair, cheap credit “masks the financial problems that people are having and stores them up for later.” 

How will a 1% rise affect debt repayments? 
The survey of over 2,000 British adults found that 43% of adults with bank loans would find it difficult to repay their debt if interest rates rose by a single percentage point, as would 39% of adults with an overdraft and 38% of those with a mortgage. An even more concerning find is that as many as 4% of those with an overdraft, a car loan or a bank loan say that a one percent rise in interest rates would make it impossible for them to repay their debt at all. 

When it comes to credit cards, 35% of those with credit card debt would find the increased repayments difficult and 3% would not be able to afford repayments. Of those with payday loans, 46% would have difficulty repaying their debt and 11% would be unable to afford repayments. 

Eileen Blackburn, chair of the technical committee of R3 in Scotland, comments ‘This increase, when combined with the predicted further short term increases should be a call to action for borrowers to assess their exposure and future ability to repay’.

How can I lessen the impact of the interest rate increases?
How did British households become so indebted? The low interest rates are partly to blame as it becomes easy to take credit for granted. It has been more than a decade since the last interest rate increase in the UK and anyone who has taken credit in the last ten years will never have experienced a rise in their cost of borrowing; they may not even understand the impact that an increase could have on their debt. If you are worried about making repayments on your debt and want to know how the increase may affect your budget, you should seek professional advice.

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