Pedestrians pass by a money lending shop in northeast London October 3, 2013. Britain’s financial watchdog drew fire on Thursday for failing to impose a cap on the huge interest rates imposed by payday lenders as it set out its plan to discipline the industry.Reuters / Suzanne Plunkett
- The IFS has sounded a warning over poor households who are falling behind on bills and debt repayments
- Those households appear to be struggling with “problem debt” which is swallowing huge chunks of their income —around a quarter of the lowest-income households are struggling with repayments.
LONDON — Most of Britain’s consumer debt pile is manageable, but poor households falling behind on bills and debt repayment represent a growing cause for concern.
That’s according to a report by the Institute for Fiscal Studies, which found that Britain’s poorest households appear to be struggling with “problem debt” which is swallowing huge chunks of their income.
The report said about 16% of the lowest-income tenth of households are in arrears on loan repayments and bills. An additional 10% of that group are not behind on bills but are spending over 25% of their disposable income on unsecured debt repayments.
That means in total around 25% of the lowest-income households are struggling with repayments.
Headline numbers are no guide to the scale of ‘problem debt’
“Debt looks like a real problem for a significant minority of those on low incomes, who are not keeping up with bills and/or spending high fractions of their disposable income on debt repayment,” said David Sturrock, a research economist at the IFS and an author of the report.
“Headline numbers are no guide to the scale of ‘problem debt’: distinguishing between debts that are entirely appropriate and those that look unmanageable is crucial.”
Over 60% of unsecured debt is half by households with above average income, which the IFS said did not represent a significant risk, especially because most of those had financial assets to cover any liability.
“Most unsecured debt is held by high-income households who look able to manage it, and more than half of those with debts have enough financial assets to pay them off,” Sturrock said.
Other findings included:
• Roughly 50% of households in Great Britain have some unsecured consumer debt.
• Almost half of that is loans from banks and other financial institutions (43%), with credit card debt the next most significant portion (25%) and hire purchase — buying a car on finance, for example — the third most significant at 21%.
• One in 10 households has more than £10,000 of unsecured debt. Debt holdings are very concentrated in the hands of that group of households, who hold 70% of all unsecured household debt.
• Those with lower incomes are less likely to hold debts, but are more likely to be in “net debt” – with debts of greater value than their financial assets (e.g. savings accounts).
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