Recent research commissioned by advisory website unbiased.co.uk has indicated that savings levels plummeted over the second quarter of 2010, as many consumers rushed to pay off debts.
The figures indicated that consumers only managed to set aside around £15.4 billion over the second quarter, which was significantly down from £22.76 billion in the first quarter.
With concerns that the UK could be heading for a double-dip recession the organisation believes that this is the key reason for consumer changes in behaviour to lending.
More than £1 billion of unsecured debt, including credit cards and personal loan debts, were paid off over the last three months up until the end of June.
This level of repayment marks a major contrast from the first quarter, when many consumers increased borrowing on credit cards and personal loans by more than £1.5 billion, while in the fourth quarter of last year people borrowed over £15.8 billion.
The CEO at unbiased.co.uk, Karen Barrett, believes that Brits have changed their financial habits “to reflect those last seen at the height of the credit crunch, with debt repayment top of the priority list.”
Ms Barrett added:
“For the first time since 2008, consumers are now paying off more debt than they’re borrowing – however this has inevitably also resulted in a drop in savings levels.”
Consumer spending on credit cards saw a drop in June due to fears over the state of the UK’s economy, according to recent figures revealed by the Finance and Leasing Association.
Spending on consumer credit products over June dropped to £4.27 billion, a significant 8% less than the same time the previous year.
Unsecured loans saw the biggest drop, by a third, to £190 million, when compared to June in 2009. Credit cards, although saw a drop of 9% in comparison to last year, were still the most popular unsecured lending product at £2.56 billion.
The Group’s Head of Consumer Finance, Fiona Hoyle, stated that June’s figures suggested that consumers were still concerned and uncertain over the state of the economy:
“It may be that they are waiting to see the impact of public sector expenditure cuts on disposable income before making any long-term repayment commitments on credit.”
Ms Hoyle went on to add:
“The statistics show that the credit market is still weakened.”
All areas of lending saw a drop over the month, with the exception of car finance, which saw a rise of 13%, year-on-year, to more than £1 billion.
The debt charity, Consumer Credit Counselling Service announced that around 6,500 self-employed people have contacted them for help so far in 2010.
The charity has reported that it was unable to help 50% of all self-employed people who approached them as they did not have enough income coming in to go on a debt management repayment plan.
In a number of instances, the Consumer Credit Counselling Service stated that some self-employed people did not even bring in enough to cover their living costs, let alone repay debts. In extreme cases some people couldn’t even afford the fees to go bankrupt.
The service has urged self-employed people to look into ways of increasing their income, such as by getting a second job or working longer hours to help make ends meet.
Geoff Waugh, Head of the Consumer Credit Counselling Service’s Self Employed Centre, commented:
“The economic difficulties of the past few years have meant that a lot of people are carrying out work that they would have previously paid other people to do. This has left many self-employed people without work and unable to maintain their debt commitments. The personal finances of the self-employed are often complicated, with little distinction between their personal and business finances.”
With many consumer’s finance under pressure with rises in the cost of living, and personal loans and credit proving difficult to come by, research has recently suggested that over 30% of people have reported a deterioration in their finances.
A study by YouGov and Markit has reported that people’s worsening financial situation has been caused by a drop in income from employment, coupled with a significant hike in the prices of goods and services.
With the public sector under pressure with pending cuts, the fall in job security has severely impacted consumer confidence. In addition to this the drop in house prices have many people concerned about the economic situation in the UK.
Additional research by Asda showed that, on average, British households’ income dropped by £5 per week over the past year. It’s believed that the fall in income is due to the fact that pay rises failed to keep up with inflation. On average, earnings rose at an annual rate of 1.6% in the second quarter, while inflation sat at 3.1%.
With inflation expected to sit above 2% over the next year or so, family spending power is likely to drop further over 2011, impacting on the availability of credit cards, personal loans and mortgages.
Markit Economist, Tim Moore, commented:
“Household finances continue to suffer from a backdrop of squeezed disposable income, stubbornly high inflation and ongoing public sector spending cuts.”
Hopes of a smaller increase in credit borrowed than first feared in 2010 has been fuelled by a slight improvement in Britain’s dreadful public finances over July.
The Office for National Statistics (ONS) indicated that the UK sank further into the red over July. Net borrowing increased by £3.8 billion over the month, however, the ONS also indicated that this is an improvement compared to the same time last year when borrowing saw an increase of £6.1 billion.
The Office for Budget Responsibility (OBR) had originally forecasted borrowing to hit £149 billion for the full year. Vicky Redwood, Economist for Capital Economics UK, commented:
“Should borrowing continue along the same path, it would undershoot the OBR’s full-year forecast by around £3 billion.This still leaves borrowing at extremely high levels and does not reduce the need for a massive fiscal tightening over the coming years.”
The amount of credit borrowed is still raising concerns amongst a number of experts. Many economists believe that the Government’s measures, announced in the Budget earlier this year, to help bring the deficit down is the right move to help the UK’s economy to recover.
A recent survey by MyVoucherCodes.co.uk suggests that at least one fifth of teenagers claim they never want to get into any form of debt. Many of them are scared of the prospect of owing money, be it a credit card, personal loan or mortgage.
The report shows that over 20% of teenagers between 14 – 17 plan to never own a credit card or take out a loan, with 13% claiming that they did not want to end up in debt, like their parents.
A significant number of the respondents went on to state that they were concerned that their spending would get out of control should they have access to credit. At least 23% claimed that the interest rates charged on personal loans and credit cards put them off.
Possibly even more worrying, 7% of young people have completely ruled out University due to worries over the large debts they could run up whilst attending.
Personal Finance Expert, Farhad Farhadi, commented:
“I think a lot of young people have been put off the idea of debt having grown up during a particularly bad recession. The younger generation are more financially savvy now than teenagers were in the past and I think a lot of youngsters have evidently learnt a lesson from their parents, who may have got themselves into debt.”
With inflation on the increase, Chancellor George Osborne is expecting yet another letter from Mervyn King, the Governor of the Bank of England on 17th August this week when July’s figures on the cost of living are published.
Mr King recently commented:
“It will take many years before bank balance sheets and fiscal positions return to anything like normal.”
“In the meantime they will act as headwinds to the recovery.”
Many economists have predicted that the Bank of England’s Consumer Price Index (CPI) benchmark will move marginally down the scale, from 3.2% to 3.1%, however, this is still well above the 2% target.
It’s thought the the rising costs in food and January’s 2.5% rise in VAT have both contributed to keeping the CPI above 3% over 2010. With annual wage growth slowing to 1.3% consumers are really feeling the after-effects of the recession.
Many are suggesting that first-time house buyers and other people looking for credit cards or personal loans should apply now, before the increase in VAT next year.
The planned VAT hike to 20% in 2011 is expected to keep inflation well above the 2% target, probably leading to yet more letters written by the Bank of England’s Governor.
Banks are being urged to offer affordable short-term loans as alternatives to the more expensive payday loans, by consumer watchdog, Consumer Focus.
According to the group the total number of people taking out high interest payday loans has quadrupled over the last few years. The study shows that around 1.2 million people have borrowed over £1.2 billion in loans.
Consumer Focus added that better safeguards need to be put in place to help protect customers from spiralling payday loandebts.
Financial Services Specialist, Marie Burton, commented:
“With the credit crunch, demand for short-term borrowing has significantly increased despite the eye-watering interest rates charged by some payday lenders.
“Such expensive rates can leave consumers who defer payments, or take out repeat loans, caught in a debt trap.”
In spite of this, Ms Burton added that the group does not agree with calls to ban payday loans as outlawing them could leave many borrowers vulnerable to the likes of loan sharks. However, she added that safeguards to protect borrowers needed to be put in place to prevent them from becoming too dependent on this form of high-interest credit.
With credit criteria loosening the Council of Mortgage Lenders (CML) have recently announced that almost 50% of all new borrowers took fixed-rate loans in June as banks and other lenders brought prices down. This is the most significant proportion seen so far in 2010.
Up until recently fixed-rate loans had proved unpopular amongst borrowers, due to the low Bank of England base rate at 0.5%. However, the cost of fixed-rate mortgage loans has dropped to more attractive levels recently, with the average coming in at 4.45%.
The CML’s latest report suggests that at least 52,000 loans were advanced in June, worth over £7 billion, up by 23% in month-on-month value.
The organisation also suggested that new borrowers were being aided by an easing in the lending credit criteria. In spite of this, the CML cautioned that the rise in lending levels are unlikely to last as the Government’s austerity measures begin to kick in.