Low-to-middle income households are most likely to have increased consumer debt during the coronavirus pandemic, but it’s more important than ever that borrowers, regardless of income, are able to Borrow Well.
Unsecured consumer borrowing, such as credit cards, loans and overdrafts, has reached record levels in recent years, with Britain’s level of consumer credit (excluding mortgages) standing at £225bn in January 2020, up from £196bn in 2017. Yet more recently, as lenders retreated from the market due to COVID-19, the ONS figures in April show the consumer debt pile shrank by nearly £7.5billion – a headline that hides a reality with a significant double edge.
Prior to lockdown, there were many households using borrowing just to make ends meet. Research by StepChange showed that in December 2019, 3.2 million people in the UK were in severe problem debt, while 9.8 million were showing signs of financial distress.
Since lockdown, many families, possibly who were already using credit cards and short-term lending for essentials, have had to increase their borrowing in the face of job losses, furlough, reduced hours or salary, zero hour or informal contracts, and statutory sick pay while self-isolating.
This month, StepChange revealed that there is already £6bn of personal debt directly attributable to the pandemic among around 4.6m households and it predicts that it is set to worsen if left unchecked.
While for some lockdown has been financially challenging, for others, they have seen significant improvements in what they have left at the end of the month as they have not being spending on many of the items they usually would, like travel to work, eating out or going on holiday. For many of those, this has given them the chance to pay off debts.
Unsurprisingly, this split is linked to income levels and levels of savings pre-lockdown. A recently published Resolution Foundation study shows that those on low-to-middle incomes are most likely to have increased their use of consumer debt in this crisis.
Proportion of respondents increasing use of consumer debt products since the coronavirus outbreak began:
(Credit: The Resolution Foundation)
The cost of servicing unsecured consumer credit tends already to be higher than other forms of borrowing (like mortgages), and this study also shows that borrowing is most likely to have increased on higher-cost, easier to access, unsecured consumer credit during the crisis, with short-term borrowing on credit cards and overdrafts having grown in usage more quickly than personal loans.
Proportion of respondents increasing use of consumer debt products compared to before the coronavirus outbreak began, by type of consumer debt product:
(Credit: The Resolution Foundation)
The importance of Borrowing Well
Against this backdrop, and coupled with a landscape of increasing levels of debt, regardless of whether people have had to borrow more or have had extra cash, as we come out of lockdown, it’s more important than ever that when people borrow, they Borrow Well.
Yet this can be difficult and consequently millions of people are in the dark about their borrowing. Many consumers borrow in haste and sleepwalk through repayments, struggling to grasp financial calculations or underestimating the burden of debt in a confusing market, with complex products and poorly presented information. Which can make the total and long-term cost of borrowing difficult to understand in a competitive environment often exploits people's perceived need for quick access to credit and focuses information on short-term affordability, for example, the monthly repayment amount
A Mintel industry report in 2019 found that “The majority of unsecured loan borrowers are living in ignorance as three in five Brits (60%) admit they are unaware of the interest rate being charged.”
The result is that large numbers of consumers don’t fully understand their borrowing, are paying more in interest and fees than necessary and carrying debt for longer. Where they do understand, they are often weighed down by the need constantly to manage their borrowing to keep it manageable.
We think it’s time this changed, it’s time to Borrow Well
While the impact of the coronavirus crisis on jobs and pay is more visible, it is important for people to understand and take control of their borrowing as lockdown eases.
Which is why, at ilumoni, we’re on a mission to make it easy for people to Borrow Well. We’ve been working to create an App that uses artificial intelligence, combining open banking, credit and eligibility data, to identify the simple things people can practically do to unlock better borrowing and start to Borrow Well.
If you are interested in hearing more about our app, register and we’ll keep you up to date with all of our latest developments.