Tom D'Arcy

Rise in personal debt – Haven’t we been here before?

Driving to work on Tuesday morning listening to Radio 4, BBC News had an article about rising levels of personal debt which made me think back to the economic crisis of 2008 which was fuelled by a reckless attitude to risk and lending to those that were not in a position to repay their debts.

According to the BBC, one in five people struggling with debt has seen their credit card limit increase automatically. It is estimated that there are 3.3 million people in persistent debt whilst the number of credit, debit and charge card transactions grew by 12% in the year to 30 June 2017, which is the highest since 2008, and the value of spending also increased by 7.2%.

The benign economy and individuals’ willingness to take on personal debt may lull lenders into a false sense of security and lending can go from responsible to reckless very quickly. In the last year, credit cards and personal loans have become easier to obtain whilst the number of cars bought under a personal contract plan has risen over the last decade from one in five to four in five.

In these circumstances, as lenders believe their risk is falling, their risk is actually increasing. In order to prevent a repeat of the 2008 crisis, the Bank consistently scrutinises lending policy and procedures and has forced lenders to hold more capital to make them more resilient to losses on loans.

It remains to be seen whether lessons have been learnt from 2008. I suspect the lure of profit may overtake whatever measures the Bank puts in place. With rising numbers of people taking on increasing amounts of personal debt it is a certainty that a proportion will be unable to repay and may have to consider some sort of formal process to deal with their debts. The extent to which this has an impact on the wider economy will only reveal itself over the coming months however this time around, let’s hope the banking sector is sufficiently robust to survive the ticking time bomb of personal debt.