Overcoming the UK’s debt problem
With around 8 million people in the UK considered to be ‘in debt,’ we speak to Daniel Tannenbaum, a consultant for Fintech and financial companies on the challenges and solutions for those facing debt problems.
For many Britons is it hard to get out of the cycle of debt. The average household has around £900 outstanding, and when they finally get back to a good financial position, they can find themselves falling into the cycle again due to increased living costs or a personal financial emergency.
It certainly does not help that loan companies and gambling firms advertise heavily on TV and the high street, making it tempting for anyone to take out high cost loans or get seduced into betting.
Another main challenge is the inability of those with bad credit to be successfully approved for loans. The FCA has done a superb job at cleaning up high-cost industries over the last few years, but the result means that there are still millions of people in the UK who cannot access finance, let alone affordable finance. The options that are available have strict criteria, high interest rates or the individual risks losing collateral.
The UK has traditionally had a problem with household debt which is usually cyclical and heavily influenced by the recessions of 1987 and 2008. Before a recession, debt levels build up and then when the recession strikes, both banks and households become more cautious and try to pay off existing credit, rather than take out new credit.
Today, the average household is faced with much higher costs for purchasing, renting and running a property, with even greater access to consumer goods such as fashion, electronics, computers, mobile phones, food and other must-haves, which cost a lot and are deemed a necessity, but would not have been 30 years ago.
Using payday loans and pawnbrokers can only exacerbate the cycle of debt for many households and provide more of a quick fix rather than a long term solution.
Finding a way to consolidate debts can be useful, since it puts all your outstanding debts into one single payment, whether it is secured against your home or using guarantor loans with the help of another beneficiary.
Debt charities such as StepChange do fantastic work and offer real solutions and education to people who have been struggling with debt.
For some, receiving a large inheritance can be an effective way to consolidate all the debts and finally get out of the cycle, but any excess funds should be used carefully to avoid falling back into the trap.
The FCA is making huge strides in cracking down high cost industries, including the price cap in the payday loans sector and the continued reviews of car finance, retail finance and unauthorised overdrafts. This in turn, causes huge disruption to some businesses that offer financial products, hence we have seen the likes of Wonga and The Money Shop recently fall into administration. This certainly poses opportunities for Fintech companies, direct lenders and non-bank institutions to provide loan alternatives and other new ways to not only help people pay off their debts, but also rebuild customer credit ratings and gain important financial education.