UK consumers pay off record credit card and loan debt during lockdown
UK households paid off a record number of credit card and loan debt during lockdown earlier this year, reducing overall debt by £7.4bn.
Outstanding balances on loans fell by £2.4bn and credit card debt by £5bn during April 2020 as consumers had less access to high street shops, less demand for petrol and could not frequent restaurants, bars or go on holiday.
There has been less access to consumer credit, since almost every private short term lender or personal loans provider halted the issue of new loans during the coronavirus lockdown period. Customers also took advantage of interest-free overdrafts and payment holidays for things like car finance and mortgage repayments – and evidently used the extra savings to clear off their debts.
We spoke to credit experts and price comparison websites to gain some further insight.
Alfie Usher, founder of army price comparison site, Forces Compare, explained: “We are more surprised than anything that people used the lockdown period to pay off debts. With people furloughed or facing uncertainty with their employment, we thought people would rather save for a rainy day and take advantage of payment holidays, rather than opt to repay any existing debts.”
“When you reflect on it,” he continued, “people really couldn’t buy anything during lockdown. They would have to go to the supermarket only once in a while, a lot of online retailers were not delivering goods and you didn’t need to drive anywhere, giving you a big saving on car running costs. Everything was actually geared towards having disposable income and paying off your debts and quite frankly, we may not ever see anything like this again.”
John Ellmore, director at Know Your Money responded: “From not dining out at restaurants to not splashing out on a holiday, most households have been more cautious with their money and spending less since lockdown began. So, it’s hardly surprising that April saw consumers repaying their debts at a record rate. Many will have used the money they have saved to pay off their credit cards and other loans, which will put them in a better position to face any new challenges the post-lockdown economy may bring.”
“However, we should remember that, despite seeing record debt repayments, many people will have struggled in this period. Numerous households have been forced to live on a significantly reduced income because of coronavirus and the lockdown restrictions, which is likely to have a long-term impact on their finances and ability to make debt repayments in the future.”
Iain Williams of QuickCarFinance commented: “We are very happy to see Britons getting on top of their finances and repaying their debts on record levels. In the motor industry, people have saved money by not having to commute and are taking advantage of lower petrol prices. Accordingly, they are using their disposable income to pay off debts rather than live an unaffordable lavish lifestyle. Those with low levels of debt and good credit scores will be much better off when applying for things like personal loans and car finance in the future.”
Whilst the high repayment levels will be welcomed by many banks, card and loan issuers, there is a debate over the detrimental impact that a fall in consumer spending has to the UK economy and to local businesses – something that the UK government is attempting to rectify with a series of business relief and bounce back loans.
With a recession expected later this year and some commentators saying that a global decline is already under way, we could see some major shifts in consumer spending and demand, with unemployment expected to rise and the future of many businesses still uncertain.
Daniel Tannenbaum is a consultant in the UK consumer finance and fintech industry