Sharp rise in personal loans ‘dangerous’ for the economy

Published by Ruth Jackson on 25 July 2017.
Last updated on 25 July 2017

A woman holding multiple credit cards

The Bank of England has warned that a sharp rise in personal loans could be dangerous for the economy as the nation continues to increase its debt.

The number of outstanding car loans, credit card balances and personal loans has risen by 10% over the past year, according to the Bank of England’s financial stability director, Alex Brazier. That contrasts with just a 1.5% increase in household incomes.

“Household debt – like most things that are good in moderation – can be dangerous in excess,” says Mr Brazier. This increase in debt is “dangerous for borrowers, lenders and, most importantly from our perspective, everyone else in the economy.”

During his speech to the University of Liverpool’s Institute for Risk and Uncertainty, Mr Brazier also raised concerns that high street lenders aren’t being careful enough about who they lend to.

“Lending standards can go from responsible to reckless very quickly,” said Mr Brazier. “The sorry fact is that as lenders think the risks they face are falling, the risks they – and the wider economy face are actually growing.”

Last month the Bank of England demanded that banks increase their finances against the risk of bad loans and Mr Brazier said it would go further if it felt more action was needed to safeguard against bad debt.

At present, banks have been told to set aside £11.4 billion over the next 18 months in case future events mean borrowers struggle to keep up with repayments.

One in four borrow half their annual income

The Bank of England’s concerns have been echoed by comparison website MoneySuperMarket.com, which reports that one in four people are now applying to borrow half their annual income as loan requests continue to rise.

A worrying 10% of personal loan enquiries to the website are for more than the applicant’s annual salary. Typically, these people want to borrow 131% of their annual income.

The average personal loan enquiry has increased by £308 over the past two years to £8,958.

“Whenever people take out a loan, they need to make sure they can afford the repayments and settle the debt in the allotted time,” says Kevin Pratt, consumer affairs expert at MoneySuperMarket.

“Interest rates are at historically low levels at the moment, but that shouldn’t be an excuse for taking out a loan without due regard to the serious financial commitment it represents.”

The most popular reason for taking out a loan, according to MoneySuperMarket, is to buy a car, with people typically looking to borrow £9,393. Consolidating debt is the second most popular reason, followed by home improvements.

A growing reason to go into debt is your wedding with that now being the sixth most popular reason to apply with an average loan amount of £7,461 - up 8.4% on 2015. But, an increasing number of people are borrowing more than £30,000 to pay for their big day.

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The problem with cheap low

The problem with cheap low interest rates has always been temptation. I spent a lot on my cards at one time and learnt a golden rule. Borrowing is easy, paying it back takes an awfully long time and costs a lot - whatever the interest rate. After a time I got to the situation where it was cheapest to borrow from me (so to speak) and pay my savings account the money and interest. You never really got it back but it encouraged discipline.