Money news, advice and predictions for savers and spenders. This week: personal loan debt.
By Jeremy Gates
If new figures detailing our personal borrowings are even vaguely accurate, Gordon Brown isn't alone in convincing himself that the best way out of any financial squeeze is to step up the spending.
Professional advice website Unbiased.co.uk says personal loan debt rose by over £1.6bn to £11.4bn during 2008.
The website nominated March 25 as Debt Freedom Day- and reckons we worked for the first 83 days of the year to earn the money to service interest charges on our debts, despite the fact that credit card debt actually fell by just over £4.9bn during 2008.
"Perhaps it takes an occasion like Debt Freedom Day to illustrate just how deeply in debt we are, and it will hopefully spur people into action to tackle debts," says spokesman David Elms.
"It's a daunting task, but with interest rates at a record low, this is the time to make money work hard to ensure any debt is repaid as quickly as possible."
Many will not escape their current financial difficulties: accountants KPMG predict that more than 150,000 people are likely to enter into an Individidual Voluntary Arrangement (IVA), be declared bankrupt or enter into a Debt Relief Order (a new option for people with little hope of repaying debts) to be introduced on April 6 2009.
"Falling house prices, the general downturn and associated increases in unemployment are starting to have an impact," says Mark Sands, KPMG's director of personal insolvency.
"Whilst consumers fight to keep their jobs and homes, for those that lose both there is often little reason for someone with debts and assets not to declare themselves bankrupt."
John Fairhurst at Payplan, a free debt advice and solutions service started in the early 1990s to offer insolvency solutions to public sector workers, including the police, says that in many cases people fail to realise they are in financial trouble until it is too late.
"They often go to the wrong place for help", he says.
"Typically they fix another loan to consolidate debts, and find themselves in even deeper difficulties before long, paying interest on interest."
Fairhurst handles cases mainly referred by Citizens Advice Bureaux (CABs) ABs, National Debtline and creditors. He compares his company with the Consumer Credit Counselling Service (CCCS): both undertake to 100% of clients' money repaid to creditors, while creditors pay 10% to Payplan as a fee.
The average Payplan client has net household income of £1,700 per month, including benefits. They are sitting on £30,000 worth of unsecured debts and after meeting all commitments, face a shortfall of about £650 per month.
Usually, this nagging gap between income and outgoings creates big problems over two years: around a half of Payplan clients who are homeowners have paid the mortgage at some stage by credit card, and they don't tell creditors of their problems for fear of losing their credit card.
Since August 2008, the 600-strong Payplan team based in Grantham, Lincolnshire, has seen a sharp rise of owner occupiers in trouble. Unemployment and redundancy have not yet figured largely in the cases it is handling.
Although the age group with the most problems is aged 35-45, the sector seeing the fastest rise in problems is older - in the 50-60 bracket.
The average owner-occupier in trouble has a net monthly income of £2,100 and unsecured debts of £41,000, including credit cards (sometimes half a dozen), personal loans, and car loans, creating a monthly deficit of about £950.
Fairhurst says they have been hit particularly hard by the clampdown on credit in 2008, and the end of easy remortgaging caused by the plunge in house prices. For many, the escape routes are cut off.
"There has been a cultural shift among creditors like Northern Rock," he says.
"The Rock moved through a phase of trying to get rid of customers, and is now trying to manage customers more efffectively."
Payplan's initial strategy is to bring the household budget back into balance: creditors are requsted to stop adding interest and other charges to outstanding accounts, if clients agree to pay an affordable monthly sum to each creditor.
About a third of Payplan clients agree to a repayment arrangement, with six out of seven choosing Debt Management Plans (DMPs) and the remainder opting for Individual Voluntary Arrangements (IVSs).
As an informal negotiated agreement, DMPs are designed to ensure that creditors are fully paid off at an affordable rate over five years, or possibly longer.
IVAs, usually applied to more serious cases, typically have a fixed five-year term. They are binding on both the creditor and the debtor, and assume the financial circumstances of the debtor are reasonably stable.
IVAs, currently running at about 12,000 per quarter, are based on creditors' agreement to write off a substantial chunk (perhaps 35- 40%) of the debt. This may be their best option, when the client might otherwise opt for bankruptcy.
Figures from KPMG suggest that average amount by somebody entering an IVA in the final quarter of 2008 was £47,800, although 500 cases involved a debt exceeding £100,000.
The typical fee for a debt advisor arranging an IVA is around £4,000. The number of IVAs agreed has fallen since late 2006, partly because the banks believed debt advisors were making too much money at their expense.
Debt Relief Orders is a third, simpler option to reduce the administrative work triggered by the great Debt Mountain.
Fairhurst believes they will be offered to people with debts below £15,000, no assets and minimal income, and little hope of paying anything off.
On payment of a £90 fee, debtors will have debts written off, and will find it extremely difficult to get credit in the future.
Some debt problems are solved informally, without using any of these vehicles. Around 5-6% of Payplan customers take advice on making contractual repayments and will handle their own financial arrangements thereafter.
About 20% of applicants don't reach any agreement with Payplan, and around 40% work with the company's special advice team - possibly because they wouldn't be accepted on either a DMP or IVA. If necessary, they can speak with Payplan advisors over several years.
Fairhurst says that in 2009 much depends on future levels of unemployment, and how well people are prepared for a sudden, sharp drop in income.
"Usually, losing a job means less money available for clients who might want to enter into an agreement with creditors," he says.
"At this stage, we can only guess at the scale of the problems in the pipeline."
:: Information: Payplan (0800 716 239 and www.payplan.com); Consumer Credit Counselling Service (0800 138 111); Dedicated Debtline for Scotland, operated by CCCS is on 0800 138 3328.
To help consumers take control of their spending habits, Unbiased.co.uk offers an online guide with information on how to budget better and reduce a personal financial burden.
Poundnotes
:: Rock bottom interest rates and sinking share prices mean 46% of adults won't bother to use their ISA allowance for 2008/9, which expires on April 5, says Barclays Financial Planning.
Asked what they would do if they recieved the maximum ISA allowance of £7,200 as a windfall, 37% would use it to pay off debts owed, while only 30% said they would squirrel it away for future use.
"In a low inflation environment, possibly even a deflationery one, an ISA is actually capable of delivering real benefits that we wouldn't see ina high-inflation economy," says Barclays' Allison Tattersall.
"This is a point which might be explained by a financial advisor, and people also need to be aware of the different types of ISA available to them."
So far as equities are concerned, Neil Cumming of PSigma UK Growth Fund is surprisingly bullish: he is attracted by the prospect of Government spending on infrastructure ahead of the London Olympics, and expects some degree of recovery in UK manufacturing.
Individually, shares in his fund include Babcock International, Carillion, WS Atkins, VT Group, miners Anglo American and BHP Billiton, only HSBC and Standard Chartered among the banks, other financials including Prudential, Legal & General and Aviva, and financial advisor St James' Place, majority owned by Lloyds Banking Group.
He has also bought a small stake in Land Securities, anticipating a bounce eventually in commercial property.
:: More than 13.5 million Britons are living through their first recession, says a new study from Lloyds TSB, which explains why one in five Brits is suffering from 'recession depression'.
The bank has lined up 1,500 financial health specialists in branches to offer free advice and support to customers on money management.
Other guidance, including frequently asked questions, real life videos and a credit crunch jargon buster are available on www.lloydstsb.com/savvyguidance.
:: By cutting prices of its WebSaver2 tariff to put it firmly at the top of energy 'best buy' tables, British Gas has really turned up the heat on its rivals, reckons Gareth Kloet, head of utliities at www.Confused.com.
Kloet says households have seen energy costs rise by 40% since summer 2008, and this latest cut will knock only £9.62 off the average annual bill.
"Switching provders has never been easier, or more important, to ensure that customers do not overpay for energy," he says.
:: Although UK households spend £2.6bn a year on broadband, some 42% are not satisfied with the service, says price comparison website uSwitch.com.
It says AOL, Orange and BT, together owning 50% of the market, hold bottom three places for overall customer satisfaction. More than eight million customers do not think their provider bothered to get the best deal for them.
While six in 10 homes now have broadband, some 6.3 million customers are still not satisfied with the service they receive.
Best overall provider is newcomer O2, which has knocked Plusnet off the top spot. Talk Talk is the biggest climber in the league table, after an 8% leap in popularity.
uSwitch.com enquiries: 0800 093 0607 and www.uSwitch.com.
:: High five savers:
Phone No Rate Account Period Deposit Interest paid
ICICI Bank UK www.icicibank.co.uk 4.10% HiSAVE Fixed Rate 24 Month Bond £1,000 OM
Halifax 0800 234 6065 4.10% (F) Web Saver Five Year Bond £500 Yly
Barclays Bank 0800 494 949 3.55% Golden ISA Instant £1 Mly
United National Bank 0800 218 2266 3.50% Three Month Gold Deposit Three Months £1 Half-yearly
NatWest 0800 200 400 3.45% Cash ISA Plus Instant £1 Mly
Top five borrowers:
Phone No Rate Period Max% Adv Fee Incentive
First Direct 0845 610 0100 2.89% for term 80% £799 Yes
HSBC 0800 494 999 2.95% for term 60% £799 Yes
Hanley Economic BS 01782 255 000 3.14% for two years 80% £799 Yes
Market Harboro' BS 01858 412 250 3.49% for two years 75% £595 Yes
Co-Op Bank 0800 633 5286 3.64% to 31/03/12 75% £995 Yes
Code:
*F - Fixed
*P - Operated by Post
*B - Operated by Post/Telephone
*T- Operated by Telephone
*W- Operated by Internet
*H- Operated by Internet/Telephone
*S- Available only to those aged 50 or over
*R- Available to those aged 60 and over.
:: Source: Money£acts - Tel: 01603 476 476 (All rates subject to change without notice)
