The Debt Bubble

Writing by Nicky on Monday 7 August 2006

Up and down the country we are hearing about rises in petrol costs, banks pushing up their lending costs, increased council tax prices and energy bills.

This is cause for concern for consumers.

Wage rises are restrained to 3.8% so do not counteract the pressure of inflation.

Banks believe they needed to increase their lending costs and bank charges to keep up with the rising costs of covering bad debts. They have also declared that they are tightening the reigns regarding their lending criteria. However, Vince Cable, the Lib Dems Treasury Spokesman, blames banks lending practices for the rise in insolvencies.

‘There is currently a considerable degree of irresponsible lending and aggressive marketing to individuals of personal loans and credit. Lenders have an obligation to stop these practices and provide greater levels of debt advice.’ ‘With interest rates rising last Thursday, families are likely to feel a further pinch on their budgets, leading to further increases in individual insolvencies.’

I partly agree with Vince Cable, but it isn’t high street banks alone.

People have access to numerous companies who hold consumer credit licences, which authorise them to lend you money.

It is currently up to that individual company to determine the criteria which will decide whether they believe you meet their requirements to lend you money. Some creditors will consider your income to decide what they will lend you without taking into consideration other financial commitments and whether you would still be able to repay your debt should an unforeseen event happen.

Figures from the DTI released on Friday, showed a record 26k people became insolvent in England and Wales during the second quarter of the year - a 66% increase in the same period in 2005. Mark Sands, director of personal insolvency at KPMG stated

‘We calculate that someone is entering insolvency every minute of the court’s working day”

Rises in Mortgage rates are also causing repayment difficulties for families. House repossessions are at their highest since 2001. CML director-general Michael Coogan said that the rise in interest rates last Thursday would add to payment difficulties for hard-pressed mortgage borrowers.

Although it is looking like things are going to get worse before they get better, James Eden, banking analyst with Dresdner Klienwort believes that things will improve by 2008. He believes this is due to banks tightening up their lending criteria. If banks become more choosy about who they lend money to, then things may filter to other companies whom may follow suit.

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