This week, it was revealed that Britons have accumulated so much personal debt that the total sum will exceed the gross domestic product (GDP) for the first time in UK history. In a report prepared by accounting consultancy firm Grant Thornton, it was revealed that personal debt in the UK now stands at £1,345 billion.
In contrast, GDP for 2007 is expected to peak around £1,333 billion. According to Grant Thornton, it will take the UK until January 2008 to produce enough goods and services to meet the amount of personal debt that Britons have incurred.
The debt has been accumulated largely through borrowing on credit cards, taking out loans and overdrafts or obtaining mortgages on a property. "Fortunately, most consumer debt is secured and can be repaid over several years, otherwise we would be technically bankrupt," Stephen Gifford, Grant Thornton’s chief economist.
Buy now, pay later
"Britain’s huge level of consumer debt is symptomatic of the country’s well-established buy-now-pay-later culture. We can no longer generate enough GDP to cover the amount we owe."
The credit culture is something that a number of commentators have picked up on and a significant proportion have blamed both the ease of access to credit and media promotion of a glamorous lifestyle as seemingly enjoyed by celebrities and the rich and famous.
In a recent Virgin Money survey, three out of four women respondents said they aspired to, and indeed felt under pressure to attain, the perfect looks and designer wardrobes of the various celebrities who dominate the glossy magazines, internet and television.
She’s got to have it
This has led to the average adult female in the UK spending around £713 a year on designer clothing, accessories and grooming in an effort to live it large like the celebrities do. Over the past year, British women have spent a combined £830 million on designer bags and shoes, £873 million on hairstyling and extensions and an incredible £262 million on tanning treatments.
Spending money on aspirational whims is something that has come in for criticism from debt advisory service Debt Free Direct. Insolvency director Derek Oakley says that "people need to make better decisions". This is particularly true, he added, when it comes to borrowing more money to pay off debt – something an alarming number of people do.
"Many people get into debt problems just by poor decision making, or really not being accurately able to assess the impact of decisions they’re making or the borrowing decisions that they’re making and whether they’re able to afford things," he explains.
Borrowing more money to pay off debts can seem like an attractive option. After all, it usually consolidates the existing debts and allows for one straightforward monthly payment. But there is evidence to suggest that a lot of people who go through debt consolidation continue to spend on credit – sometimes even using their consolidation loan to do so. You need to see consolidation as a new beginning and not as a reason or excuse to borrow more.
Take a look at MoneyExpert’s debt consolidation calculator and see how much you could save.
Many more lenders saying "no way" to IVA
Mr Oakley is not a fan of taking out a loan to pay off existing debts. In most circumstances, he says, it is a pointless exercise akin to "shuffling the deckchairs on the Titanic".
Another thing that borrowers may want to consider is the fact that lenders appear to be taking a harder line on entering into Individual Voluntary Arrangements (IVAs). These have become increasingly popular in recent years, as they allow the borrower to make an arrangement to repay a proportion of the debt over a fixed time and have the rest written off.
Lenders are becoming concerned that IVAs are being perceived as a soft option to bankruptcy, according to Debt Action. It can no longer be assumed that they will automatically agree to enter into one and anyone who assumes that they will is "heading for trouble", the advisory service warned.
What are the next steps?
1. Use MoneyExpert’s debt consolidation calculator to see if a consolidation loan could help
2. With small debts – could a 0% balance transfer credit card help? Compare the best 0% cards in the market at MoneyExpert today