The UK’s Short-Term Debt Problem

financingToday, the economic situation for many UK households remains invariably difficult. Although our unemployment figures are some of the lowest for several decades, we are not as well off as we once were as our country and indeed the world becomes a much harder place to live. Many families feel that they are financially fragile despite bringing home a modest income. Those who would once upon a time have been classed as the middle classes are today feeling the squeeze just as badly, if not more than, low-income earners.

Following the UK’s economic downturn, wages have stagnated and there are millions of UK households living far below the poverty line, even where that household has at least one person in full-time stable employment. It is a precarious situation to be in and this has been a huge contributory factor to the increasing short-term debt problem – more and more people are turning to short-term lenders to tide them over bills and unexpected payments.

Although borrowing from reputable short-term lenders is risk-free so long as you make your repayments early or on time, many people fail to do this, and their debts rack up interest and late payment fees. You can find more interesting stats about short-term loans on this Cash Lady index. As you can see the index has a lot to offer when it comes to short-term loans and who tends to borrow.

#1: What Has Led to This Problem?

In short, general economic downturn – thanks, in part, to the 2008 Global Financial Crisis – has led to the financial struggle which many UK households are feeling. Changes to the structure of work and employment patterns – including the growth of self-employment and zero-hours contracts – as well as changes to state-provided benefits have led to households being less financially stable.

All this has led to households having unpredictable incomes, which leads to a precarious situation where people are faced with either borrowing money to meet their financial obligations or risk not being able to make a payment; it’s a catch-22 situation because fees and penalties can be charged for missing bill payments and loan repayments. For the first time in its history, the UK has relatively low figures of unemployment and inflation alongside unusually high housing costs.

Many of the households which fall into financial trouble are not well-placed to get out of the rut and manage the financial risks which come with financial obligations. These households struggle to cope with income fluctuations and unexpected expenses. Four-in-ten UK residents have less than one week’s worth of their income in a savings account.

#2: The Role of Loans and Short-Term Credit

Rather conveniently, the access of UK households to both short and long-term credit options is easy. Many of these lenders welcome new customers with open arms, often lending to people with low or no credit history and they provide funds to people who need immediate cash to meet their financial needs.

This high-cost short-term credit is unsecured and tends to last less than one year with an interest rate which exceeds 100% APR. Although they are only meant to be short-term solutions, many households and individuals find themselves unable to make the repayments and their loans can last for years beyond their intended period of borrowing. Access to these financial services can be found both online and in the high street, making them a highly convenient and attractive solution for households struggling to meet their monthly financial obligations.

Although short-term lenders facilitate this level of somewhat irresponsible borrowing, they are not 100% to blame. They are a business just like any other which provides a service for a profit; it is the actions of the borrower which are most at fault here.

#3: What’s the Solution for Those Who Fall into the Debt Trap?

Unsurprisingly, banks and other lenders are keen to get their “bad customers” off their books. Although they make money by providing loans, chasing up customers who consistently fail to pay on time can become a costly undertaking. Thankfully, there is a solution.

For banks with customers who hold interest-only mortgages and have taken out loans which are not being repaid, they can offer these people the option to switch from their current interest-only loan to a lifetime mortgage with the insurer and equity release provider Legal & General.

Prior to the 2008 Financial Crisis, interest-only mortgages were very common, but today they cause major problems for banks as customers are unable to meet their repayments. Historically, borrowers only had to pay off their interest on loans each month rather than paying off the capital. This was a simple way to reduce monthly repayments, however, many of those who borrowed are reaching the end of their interest-only terms and have no way to pay back the residual debt.

By switching their loans to a lifetime mortgage, the borrower will be given a cash lump sum which can be used to pay off the entirety of the interest-only loan they hold with the banks. As for the lump sum, this is recouped by the insurer when the homeowner passes away or moves into long-term care through the sale of the home.

Although this is not going to be a viable solution for everybody – particularly those who do not own their own home or only have short-term “payday loan” debt – it could be very useful for people who took out large bank loans and are struggling to meet their repayment obligations.

If this scheme goes ahead, it shall be useful to see just exactly how it plays out. Virgin Money is currently in discussions with banks and Legal & General to make it happen.

UK households right now are facing unique financial problems, the likes of which have never been seen before. Thanks in part to the rising cost of living, stagnated wages, unpredictable employment and the 2008 Financial Crisis, many households that were once considered “well off” are now struggling to make ends meet and are turning to short-term funding in-order to pay bills and meet other financial obligations. This is a growing problem which is continuing to affect households up and down the country, and something soon has to give.

Join the discussion