Introduction - what is causing the rise in consumer debt and business debt? Sometimes personal failures lead to addictions such as gambling or shopping. Other times, people simply don't bother to budget and save. A lot of the time, people's individual circumstances change through no-fault of their own... Completely unexpected events such as redundancy, serious illness, bereavement or a marriage separation can take an individual's priorities away from personal financial management on to more important issues at the time. In addition, debt problems tend to occur over a longer period of time and are easily ignored as a problem to put off to sort out another day. When people stretch themselves too far and circumstances change, they can just about cope. The problem can easily become compounded are made worse by additional borrowing. Debt management is such a serious business as it involves people's lives who are feeling vulnerable, frustrated, pressured, stressed and confused. The effects of overwhelming debt levels can lead to mental health problems and breakup relationships. The following sections summarise the main cause of debt problems:-
Student loans - for hundreds of thousands of students across the UK, student loans are the only means of paying for living expenses while studying for a university degree. Grant maintained education is no longer provided by local authorities, are does not form the basis of government policy in higher education. With the huge growth in the number of students encouraged to go to university, student funding has become too expensive for Governments to continue to fund. A lot of young people with debt problems these days are those that have left university without a job with students loans and credit card debts to repay. This has carried on into adulthood as the problem has stayed with them into their professional careers. There is very little education with regards to managing personal finance, either in school or at university. To make matters worse, banks and other lenders actively target students' for new credit cards and personal loans, the very first day students begin at university (at fresher's fairs and events). They have made obtaining credit very easy for young people.
Redundancy & Loss of Overtime - improvements in technological advances are allowing employers to replace staff with information technology solutions, (such as outsourcing call centres). There is an increasingly large skills gap appearing in the UK workforce despite rising unemployment. There has been a rise in the number of mortgage insurance and rent insurance policies taken out recently as the continued bad news creates an atmosphere of fear, uncertainty and doubt. For employees who have not taken out insurance against the effects of redundancy, personal debt continues to rise. When full-time workers on low incomes with dependants are unexpectedly made redundant, cash flow problems naturally begin. As real incomes fall in proportion to rising inflation, more and more people are relying on overtime, bonuses and hoping for pay increases, to supplement their basic salary. Many people have supplemented their salary with loans or relied on other forms of credit to top up their monthly incomes. Unfortunately, more and more employers are postponing annual pay reviews, cutting back on overtime expenses, cancelling interim dividends and bonuses and making employees redundant. As the credit crunch bites, staff costs are a major variable cost which employers are being forced to reduce.
Pregnancy - the change in women's attitudes to work over the last 30 years has resulted in more and more women choosing to postpone a family for a career instead. The introduction of equal pay legislation and the cultural shift in attitudes between today's generation and their parents, means millions of working women have become reliant on income and are sometimes the main breadwinner. Pregnancy, whether planned or unexpected naturally creates a drop in income and usually results in a reduced income on return to work while the balance between bring out more baby and is maintaining a career becomes a juggling act. The pressures on parents these days is immense with the cost of childcare, fuel and food rising significantly due to inflationary pressures and the credit crunch. With a commitment to raising a family in the best possible way a top priority for every parent, pregnancy indirectly causes debt problems, particularly where it is unplanned.
Illness or Disability - none of us expected to become ill and really sit down to budget for such an event occurring. During a personal crisis, financial considerations naturally take second priority. A prolonged illness can sometimes mean a lengthy absence from work and on of the causes of debt problems in the UK. Debts problems in themselves can cause mental and physical health problems such as high blood pressure, depression and low self-esteem. Personal payment protection insurance has evolved to protect loss of income due to sickness or ill-health. These types of policies are sometimes complicated to understand and tend to exclude certain illnesses. In addition, the controversial and complex allowances system for people who are unable to work due to illness, can itself add to the pressure of not being able to work. It is not always clear to claimants that they are entitled to certain tax credits or allowances. The pressure and the onus on individuals to prove an illness or disability, is leading to a shakeup of the disability allowances system to minimise the impact of fraud. This is leading to an increase in paperwork and administration. That can also be created from the additional costs of sudden disability such as transport, home help, a change in accommodation to cater for access and special diet needs. In addition, partners or other family members may have to sacrifice their income in order to assist for their loved ones.
Bereavement - no words can adequately describe such a tragic and personal time in a brief person's life. The balance between the time to grieve, be with loved ones and friends and rebuilt a different life, naturally overtakes the long-term motivation to work and earn money. Even funerals themselves cost money and can be an unexpected additional cost which nobody expects already cares about paying at the time.
Separation - an unfortunate fact of today's modern world is that many couples decide to live together, sharing the costs of the household and the relationship and unfortunately split up. This often leaves financial problems where incomes and costs had been shared, during the time where the couple were in love and felt able to commit to what seemed like a perfectly equitable financial arrangement. Sometimes one of the couple can leave bad debts which can impact of the other as their credit history reports are linked via association, by the credit referencing agencies. In other situations, couples can disagree over who should repay a debt that was originally applied for on a joint basis.
Divorce - the financial and legal rights of a married couple differ from those of couples who live together. It is broadly similar when a married couple chooses to divorce, particularly where there are children involved and custody battles are fought. Joints debts on credit cards, bank accounts and personal loans must be resolved in the divorce process and one party may unexpectedly discover that they are left with an increased level of debt to repay, without the means to repay it. For difficult divorce cases, the legal costs can be huge and any settlement or court decision may have a profound impact on the future financial choices of both parties involved.
Money mismanagement - the complicated tax benefit system involves completion of enormously difficult complete application forms. Applicants unsure of how to complete these forms have done so incorrectly, while the back-office benefits system has been in chaos due to incorrect overpayments. As a result, low income applicants have found themselves spending money they should not have received and obtaining debt, while the whole point of the system was to try and alleviate financial hardship for low income earners. There is also a general ignorance and misunderstanding regarding personal financial products and services as well as a failure to properly account for future business taxes that may be levied. The wealth of choice and ease of use of unsecured personal loans, credit cards and banking facilities as in the past, made it all too easy to overspend in the shops and switch debts between financial organisations. Most people could not accurately quantify the interest rates on their credit cards or remember administrative or termination charges applied to unsecured loans. In simple terms, people sometimes don't even know how much debts they are in. There seems to be a perception in consumer's mind is that debt can be manageable at certain levels and this is simply the cultural norm.
Aggressive Creditor Action - when a creditor sends a letter to a debtor, with an aggressive tone threatening legal action, people feel under pressure. There have been thousands of examples where large organisations have incorrectly sent out reminder notices, quoting debt collection practices all possible legal action. Classic examples utility companies that have sent out bills with the wrong amount. There sometimes appears to be little recourse for pressured consumers to challenge what they feel is an incorrect bill or invoice the payment. Regulatory watchdogs have grown in number over the last decade, but have been fragmented and slow to respond. They aim to help consumers with complaints regarding inaccurate billing or unfair tactics to reclaim outstanding debt.
Consolidation Loans - during the boom times, homeowners were attracted to easily obtainable cheap secured loan products for home improvements, holidays, new cars and 'any purpose' style loans. A loan secured against the equity of people's homes provided a simple and easy way to obtain a new conservatory, replace their old bathroom or put in the roof extension. Specialist debt consolidation companies sprang up offering telephone-based decisions for people of all backgrounds, including with poor credit histories. Price comparison websites also included the ability to apply online from hundreds of secured loan products making it easy and quick to secure additional debt. The many homeowners, it felt like any home improvement cost would be clawed back in the seemingly endless price rises experienced over a decade of property rises. Young homeowners, too young to remember the last property crash, and keen to get on the housing ladder, borrowed using secured loans. Now the housing market is in decline, this additional debt burden is causing problems. People are finding that the additional 10 or £20,000 they borrowed against their property is now pushing them into negative equity.
Car Financing - one of the most popular types of unsecured debt is in the form of a car financing agreement. Most dealers and manufacturers offer an attractive financing agreement to enable people to spread the cost of motoring over a number of years. These types of schemes are often highly flexible. They may entail a providing a fixed deposit on a hire purchase agreement that allows the individual to own the assets at the end of the life of the agreement. Alternatively, a straightforward unsecured personal loan is used to buy the car outright.
Gambling Addictions - addiction to gambling is a dreadful and extreme causes of debt problems in the UK. With the introduction of online gaming, the promise of instant winnings and the anonymity of gambling from home, it has never been easier to lose so much money, as quickly, as it is today. There are thousands of gaming websites around the world. Unfortunately for the older generation, their children are much more Internet savvy than they are, exposing the risk of credit or debit card misuse. Of course it is possible to win as well as lose, and too many gamblers try and gamble their way out of problems by taking even bigger risks. Addictions require professional counselling over a long period of time before an individual can resolve the issues. The relaxation of gaming laws has been controversial in the political spectrum as it could be argued that making gambling more accessible is causing more gambling. The other argument specifies that it is becoming more regulated and potentially more manageable.