Should I be worried about a new debt crisis?

Should I be worried about a new debt crisis?
If you’re applying for finance, it seems you’re in good company. The Bank of England reports that credit cards and personal loans are exploding in popularity. The media has recently been getting very excited about the world of personal finance.

The Guardian led this morning’s daily briefing with a story on ‘Why personal debt could bring down [the] economy’, while the BBC preferred ‘Rise in personal loans dangerous’. Is there any truth behind the headlines? Are personal loans really bad for us? I decided to dig down into the facts and find out more about what this means for you, the consumer.

Media buzzing about borrowing

Both the BBC and the Guardian point to a press release from the Bank of England as the trigger for their panic. The title is quite exciting for something from the Bank of England - "Debt strikes back" or "The Return of the Regulator". It sounds like the Bank of England is becoming a hotbed of Star Wars fandom. The press release is from a speech given on the 24th July by Alex Brazier, Executive Director, Financial Stability Strategy and Risk. His previous publication, ‘How to: MACROPRU. 5 principles for macroprudential policy’ doesn’t sound quite as exciting.

Too much debt?

So what does Brazier think is the problem with personal loans?

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.

This is sensible advice - before resorting to credit, you should always compare your options. If you do decide to go down the borrowing route, be certain you're able to afford any repayments, whether that's for a card or a loan.

Huge demand for car finance

Brazier also touches on car finance in his speech to the University of Liverpool’s Institute for Risk and Uncertainty. At Choose Wisely, we’ve seen more and more interest in car loans over the past few months. In fact, Alex mentions that over four in five new cars are bought using PCP - a credit agreement. This compares with just one in five in 2006. There are plenty of different options available for car finance, and it’s worth shopping around and comparing offers - the dealer may not be able to offer you the best price.

Worrying about debt

Car finance seems to be a sector which concerns the Bank of England, as Brazier warns that:

…the level of consumer debt is no higher relative to incomes than it has been on average in the past twenty years. But within this overall picture, consumer credit has been growing very rapidly. In the past year, outstanding car loans, credit card balance transfer and personal loans have increased by 10%, while household incomes have risen by only 1.5%

This part of the press release seems to be the cause for concern in the media. There’s been an increase in borrowing that’s growing at a much faster rate than people’s incomes. However, it might be a bit early to panic, especially if you’re hoping to borrow money.

Cheaper, easier borrowing?

In fact, what could be bad for the lenders might actually be a good thing for the consumer. If you want to borrow, then you’ll be looking for a good deal, and now is a great time to find one, as Brazier himself points out.

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.

So lenders are likely to be less concerned about your credit score, and the rates you’ll be offered may be better than before. In fact, this is not just Brazier’s own idea - as you can see in the official July 'Credit Conditions Review' (not exactly a page turner). This publication shows that 0% balance transfer card offers have been getting better since 2010, and if you're looking for a card, you may get a great deal right now by shopping around.

What does it mean for you?

If you’re trying to build up your credit score, now could be a good time to take out a credit-building credit card. With lenders more likely to take on new borrowers, you may find it easier to get accepted for a card or loan. However, borrowing should be a last resort and it's not worth taking on debt if you have other options available. If you’re trying to build up credit by taking out a credit card, check that you’ll be able to at least afford the minimum payment.

Whether you’re looking for a credit card or a loan, make sure you get the best deal by comparing your options and only applying to the lenders who are most likely to accept you. To find out more about suitable lenders without impacting your credit score, it’s worth using the Choose Wisely Eligibility Checker.

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Use the Choose Wisely Eligibility Checker to find a suitable lender in just a few minutes, without impacting your credit score.

Written by Chris
Published on 25th July 2017
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