What is the real cost of debt?

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The greenshoots of recovery may have brought a spring to the step of  the Government before the end of Parliament, but what about the longer term consequences of the Great Recession and the staggering levels of personal debt that have resulted? Society Central’s Christine Garrington looks at the evidence and examines calls for the Government  to stop looking at debt in numbers alone, and to do more to help those struggling to make ends meet.

Research using the large scale household survey Understanding Society indicates that high levels of personal debt could be creating a health time bomb. Another report says for those people struggling to make ends meet, things are going to get worse before they get better. Meanwhile there are calls for policy makers to stop describing debt crisis by the size of debt alone, arguing that debt support should be tailored to the individual struggles individuals face, and that lenders who cause the most harm face stronger penalties.

Researchers at the Personal Finance Research Centre at the University of Bristol have shown what they describe as a “staggering” and “inextricable” link between financial problems and low mental well-being in older people, concluding that this latest prolonged and difficult recession could leave a health time bomb linked to high levels of personal debt.

Coalition government policies are failing to take the financial inclusion agenda seriously and  the Government needs to do far more to help those people who are struggling to make ends meet.

The study  shows that older people who get into financial difficulties are eight times more likely to report being mentally unwell or depressed than those who live comfortably.

Bankruptcies up among older people

Last year bankruptcies among over-65s rose by 470 per cent to 1,972 people and the size of debts also increased with an over-55 borrower having 36 per cent more unsecured debt than in 2011. The research analysed data from the UK’s largest social survey, Understanding Society, in which nearly 20,000 people aged 50 and above were questioned.

In an interview for Understanding Society, David Hayes, a research associate at Bristol University’s Personal Finance Research Centre, said the results had widespread consequences:

Meanwhile, researchers Karen Rowlingson, from the University of Birmingham, and Steve McKay, from the University of Lincoln, say the success of policies to tackle financial exclusion is at risk of being reversed as the Great Recession is placing huge pressures on household budgets. They say Coalition government policies are failing to take the financial inclusion agenda seriously and that the Government needs to do far more to help those people who are struggling to make ends meet.

The briefing, from the first in a series of reports commissioned by the Friends Provident Foundation designed to measure changing levels of financial inclusion in Britain from 2013–2017, uses a number of data sources including Understanding Society and the British Household Panel Survey to show that half of people in the bottom third of the income distribution said in 2010/11 that they were finding it difficult to get by, or just about managing.

In 2013, the briefing says, most people (53 per cent) said they were cutting back on their spending. One in ten of those who were in manual work or were out of work were even cutting back on basic food.

Unexpected expenses a problem

The report says people have very little capacity to meet unexpected expenses, even relatively small ones, with about one in five of the population saying they would have to borrow money if they needed £200 at short notice – either through a formal loan (credit card, overdraft, loan etc) or through an informal loan from family/friends.

Only two in five said they would be able to find £200 without cutting back on essentials or dipping into savings.

In an interview for the Understanding Society Podcast Series, Professor Karen Rowlingson, one of the authors of the report, said there were also concerns around affordable credit and the use of pay day lenders:

A financially inclusive society is defined in the report as one in which everyone has the ability to:

  • manage day-to-day financial transactions (eg, through appropriate bank accounts)
  • meet one-off expenses (both predictable expenses through savings, and unpredictable expenses also through savings and/or appropriate credit and insurance products)
  • manage a loss of earned income (eg, through savings, including pension savings)
  • avoid/reduce problem debt

To achieve this, the researchers say, people need to have a secure income which meets a minimum standard (having what you need in order to have the opportunities and choices necessary to participate in society). There need to be appropriate and well-regulated financial services, bank accounts, savings accounts, affordable credit and insurance products. There should also be easy access to free and appropriate advice and education, particularly for those with debt problems.

“This is the longest and deepest slump in a century and we are already seeing signs, in the available data, of a major impact on people’s finances. But the most relevant data sets in this field only provide data up to 2010–11 and so the impact of the recession in 2013 may be even greater. Furthermore, the situation looks set to worsen still further in coming years due to recent welfare reforms.”

“Unless there is a major improvement in the economy and/or government action to support those struggling to make ends meet, we will see further reductions in financial well-being and inclusion in future years.”

The real impact of debt

Britain’s staggering£1.4 trillion debt problem has prompted the think tank Demos to call on the Government and others to look at debt from a different perspective. Instead of just looking at debt in numerical terms, it wants the real impact of debt on people’s lives to become the focus of policy.

It has created a ‘Harm Index’ to achieve just that, suggests ways that debt support should be tailored to the individual struggles individuals face, and also argues that lenders who cause the most harm face stronger penalties.

Researcher Jo Salter explains:

“Comparing the ‘Harm Index’ scores and some other key stats for different debts paints a much more granular picture of the debt sector – from the point of view of borrowers themselves: Demos is calling for tougher financial penalties for lenders who cause the most harm via a proportionately higher levy to fund debt advice services. Not all debts are the same, and understanding the emotional and social harm that each specific form of debt causes is vital to getting a grip on Britain’s debt crisis.”


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