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In 2004 personal borrowing in the UK passed the one trillion pound mark for the first time.

In the year to the 31st March 2003 Stoke on Trent Citizens Advice Bureau advised people with debts totalling £13.5 million. Around 700 people in the City with complex multiple debts got help from our specialist debt workers, and many hundreds more received advice with simpler debt problems. Debt now accounts for 30% of our work.

Looking for reasons why people continue to bring personal debt problems to us in such numbers has led us to conclude it is no longer simply a matter of personal misfortune or sudden changes in personal circumstance throwing previously stable family budgets into disarray, but increasingly we are finding it is the behaviour of creditors that lies behind many debt problems.

It is common for loans of this sort - consolidation loans - to be aimed at people struggling to keep on top of their borrowing, and can often make the situation worse by converting unsecured loans into mortgages. These loans can seem attractive at first because the interest rate is usually much lower. However, over the lifetime of the loan the borrower will usually end up paying more money back to the lender than they would have done, and of course if they fail to maintain the payments they are at risk of losing their home.

When interest rates are low, consolidation loans can appear an attractive alternative. We have genuine concerns that any rise in interest rates increases the risk of people losing their homes.

"Sid” and “Mary” are aged 69 and 76 respectively and their only income is their Retirement Pension. They live in a rented house and have no savings. They are both ill. They owed £20,000 and were struggling to keep up the payments. They talked to their bank before the problems became too serious, to see what help they could give (as borrowers are often advised to do), and were offered a new loan of £23,000. However, this meant they would still be repaying the loan until they were 76 and 83 years old respectively, and significantly increased the amount they owed.

The last thing “Sid” and “Mary” needed was more debt.

"Brian” has been off work due to ill health for nearly a year. It is uncertain when he will be able to return to work. He has debts of about £18,000 mostly on credit cards and a sizable unsecured bank loan. Having been to us for debt advice he was considering applying to go bankrupt. When he went to the bank to inform them of his intention and to check if he could still use his current account he was offered a consolidation loan, despite the fact he could not meet his current loan and credit card repayments and with no reasonable prospect of his circumstances improving.

Fortunately “Brian” refused this offer and proceeded with our advice.

"Amy” is a lone parent living on one of Stoke’s Council estates. Her only income comes from Social Security and Child Benefits which are currently insufficient to meet all of her day to day living expenses, including arrears on her Council Tax and Water rates. Several years ago she was offered a small, short term loan to tide her over at Christmas by a friend of hers who worked part time as an agent for a national credit company.

At first “Amy” was delighted with this offer of help. Since then whenever she has been close to paying off the loan, the agent has offered her a further loan, which “Amy” found hard to refuse. She has now become dependent on these regular top ups to help meet one-off expenses such as new clothes for her children, presents or unexpected bills, and now does not envisage a time when she will not be paying money back.

“Amy’s” situation is typical of that created by so called “sub-prime” lenders. Offering small loans over short periods to people unable to get credit elsewhere, they justify the exorbitant interest rates, which can be as high as 1,000%, by the fact they are taking a higher risk.

Ironically, those that can least afford it have no alternative but to resort to the most expensive type of credit available.

When he came for advice, “Steve” told us that some of the first letters he received after his 18th birthday were from credit card companies offering to lend him up to £5,000. He took up their offer. At this time he was living at home and had a temporary, low paid job. When this job ended he found he couldn’t afford the payments and fell behind.

On returning to work he took out a consolidation loan which he also had difficulties with when this job, also temporary, finished. He is now considering declaring himself bankrupt in his early twenties. He tells us that he would never have considered getting so much credit if he had not received so many offers through the post.

Steve’s case is typical of the aggressive marketing of credit, especially to young people. We have seen many young people whose credit repayments have been based on the low expenses they have while living with their parents. They then find it extremely difficult to maintain their payments if they move out of their parents’ home either to work elsewhere or get married.

As the credit market has become more competitive, sales tactics have become more aggressive, and less concern is shown for people’s ability to repay loans. The consequences of this situation are potentially disastrous.

The Government is clearly concerned about levels of personal debt. The Department of Trade and Industry and Department of Work and Pensions published an action plan in 2004 for tackling over indebtedness. The Office of the Deputy Prime Minister has produced an action pack showing how a range of statutory and other organisations can help people in debt.

There is light at the end of the tunnel regarding irresponsible lending. The Government is consulting about several changes to the law. They suggest a cheaper, simpler version of Bankruptcy to help those who cannot afford the current fees; a new type of Court Order to give temporary respite to people unable to make payments in the short-term; and strengthening of repayment schemes offered by some private and voluntary organisations.

These proposals are not yet law, but if they become law they should make lenders think twice before offering credit.

Stoke-on-Trent CAB - a registered charity & Company Limited by Guarantee © Stoke CAB 2004 - 2008

irresponsible lending

Stoke-on-Trent CAB - a registered charity & Company Limited by Guarantee
© Stoke CAB 2004 - 2008