One in four people want to borrow half their annual income
Personal loan applications soar as the Bank of England fires warning shot at lenders
The average loan request has increased by more than £300 in the past two years as households struggle with the cost of living as well as big events, the latest research has revealed, with the total outstanding balance now standing at £12.4bn.
More than one in four Brits want to borrow an amount equal to at least half of their annual income, according to data from MoneySuperMarket.
One in 10 hope for more than a year’s salary, an average of £5,000 more than their typical £16,360 salary the comparison site has found, in a bid to cover expenses including car purchases, consolidating personal debts, home improvements, holidays and weddings.
“Whenever people take out a loan, they need to make sure they can afford the repayments and settle the debt in the allotted time,” warns Kevin Pratt, consumer affairs specialist 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. Inflation is rising and is forecast to increase further, and there is some suggestion that the Bank of England might increase its Base Rate before the end of the year.”
The news comes as the Bank of England’s financial stability director, Alex Brazier, warned that the huge rise in personal loans could now destabilise the UK economy.
High levels of mortgage debt can make downturns deeper by causing consumers to aggressively cut back spending in order to service their mortgages. High levels of consumer debt – like credit card debt and personal loans – can make banks more vulnerable to downturns because borrowers are much more likely to default.
More vulnerable banks cut back lending, also making downturns deeper. It means countries with higher levels of debt can have more vulnerable banks and deeper recessions, bringing with them potentially damaging effects on everyone.
“Household debt – like most things that are good in moderation – can be dangerous in excess. Dangerous to borrowers, lenders and, most importantly from our perspective, everyone else in the economy,” Mr Brazier said in a speech to the University of Liverpool’s Institute for Risk and Uncertainty this week.
In a period of good economic performance and low loan losses, lenders can enter a “spiral of complacency”, with lenders thinking they can reduce prices and loosen lending criteria, he says. As credit becomes cheaper, it’s taken up more widely and is serviced more easily.
Debts on credit cards, personal loans, and car finance are up 10 per cent in just a year, despite household incomes increasing by only 1.5 per cent over the same period. In fact, the average British consumer will owe £309,000 over their lifetime, incurring total interest charges of £111,000.
“The spiral continues, and borrowers rack up more and more debt. Lending standards can go from responsible to reckless very quickly,” Mr Brazier added. “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.”
Terms and conditions on credit cards and personal loans have become easier, and lenders’ own assessments of how risky these loans are, and which they use to calculate how much capital they need to withstand losses, have fallen. But credit scores of new borrowers are lower than they were two years ago.
“Lenders have been the lucky beneficiaries of the benign way the economy has evolved. In expanding the supply of credit, they may be placing undue weight on the recent performance of credit cards and loans in benign conditions.”
Meanwhile, there are signs the boundaries of mortgage lending are being pushed after the last financial crisis prompted an overhaul in the way mortgage applications were considered in a bid to curb unaffordable home loans. Fierce competition for business means borrowers are increasingly able to access mortgages worth higher multiples of their income.
In response, the Bank of England will put “defence lines into the system to guard against the spiral of complacency by lenders and to protect the wider economy”. These include the supervision of banks and building societies, restricting high loan-to-income mortgage lending and regularly stress testing lenders to make sure they have the strength to deal with very severe recessions without cutting back their lending.