FOOL'S EYE VIEW
UK Consumers Are £700b In Debt

By Jane Mack (TMFJane)
November 12, 2001

We are clearly becoming a nation of debtors. For the first time, consumer debt in the UK has reached a record level of £700 billion.

Look at that number again. £700 billion. It doesn't seem possible, does it? Why on earth are we borrowing so much? A large chunk of this debt relates to mortgages -- about 80% of it in fact. But that still leaves the average non-mortgage debt at over £5,000 per household.

It's alarmed the Trading Standards Institute and the Office of Fair Trading so much that they've dedicated their annual National Consumer Week to debt control. The campaign, which was launched earlier today, urges people to think carefully before borrowing money or buying on credit and to shop around for the best deal. Not surprisingly, they also suggest that people seek good, impartial advice if already in debt.

This is, of course, something the Motley Fool has been advocating for a long time but the message bears repeating.

The campaign is careful not to criticise lending institutions but points out that some high street store cards charge Annual Percentage Rates (APRs) as high as 31.9%. We're also told that more than 80% of people with unsecured personal loans with the major banks were already customers, indicating a reluctance to shop around for better deals.

So - not only do we appear to be borrowing too much but we're clearly being a bit stupid about it too, even if the campaign literature doesn't quite say it in so many words. At least it serves as a timely reminder that we need to take control of our finances sooner rather than later.

Top Tips

The campaign offers some top tips for consumers who intend borrowing money so here are a few of them along with our Foolish comments:

1. Can you really afford it?

It's a sensible question, of course, and one that people should consider more seriously. We often only think about short-term affordability – we may feel that that we can make repayments this month and next month and the month after but how sure are we that we'll still be in a position to do so this time next year? We assume we're not going to lose our jobs or fall ill and that nothing will stop us from being able to repay. Besides, we obviously want that new kitchen or holiday or car now.

2. Shop around for the best deal

It's shocking how frequently that old chestnut – inertia – surfaces. It's true that some people have credit ratings that aren't good enough to get cheaper deals but, for the most part, we're paying more than we need to in interest charges simply because we're lazy.

3. Read the small print before signing

Aaaargh! We can't think of anything more tedious but it has to be done. If something's not clear, ask. How many people do you know who see the error of their ways, try to switch to better deals, only to find they've got redemption penalties to pay? Don't be one of them!

4. Check how much you'll pay back over the length of the loan

This is another thing people often ignore. If you borrow £1,000 on instant credit at an APR of 25% over five years, you'll pay £675 for the privilege. How much do you really want that widescreen TV? Do you really need it right now or could you save up for it?

5. Watch out for optional extras such as payment protection insurance

Ah, yes. This is a particular favourite with lenders. Often their application forms require us to tick a box if we don't want insurance and, since many of us don't bother to read the small print, we get lumbered with paying extra for something that we may not even need. If you're self-employed, on a short-term contract, have savings that could easily cover the monthly repayments temporarily or have a general income protection policy, the insurance that you're paying for either won't cover you or you don't need it.

6. Beware of loans secured on your home – you could lose it

Sometimes there are good reasons for releasing some of the equity in your home but you need to think long and hard about borrowing money against the roof over your head. If it's for something that may add value, such as a new kitchen or a loft conversion, then it's worth considering. But is it really worth risking your home so you can drive around in a new car that will depreciate in value by 30% the moment you drive it off the forecourt? Not to mention the fact that, if you pay off the loan over the full term of the mortgage, you'll probably be making those extra monthly repayments long after it's been consigned to the scrap heap.

If there's anything National Consumer Week is all about this year, it's not just the fact that keeping debt under control makes sense but that it is the consumer, who is responsible for doing so. The financial services industry has much to answer for considering how much they like to obfuscate the information they feed us. But, ultimately, it is we who have to sign on the dotted line whenever we borrow money and perhaps we should think about that a little more.

More information: Get out of Debt | Credit Cards | Personal Loans