UK Consumer Debt After Covid-19
This article will discuss UK Consumer Debt After Covid-19.
There is no doubt that the Covid-19 outbreak has had a profound impact on the global economy and household incomes across several countries. With many people losing their jobs, millions furloughed and business owners facing an uncertain future, consumer debt is likely to rise significantly in the aftermath of prolonged lockdowns. In this guide, we’ll explore the current situation and analyze how the pandemic has affected UK debt levels.
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The impact of Covid-19 on consumer debt
As case numbers rose sharply in March and April, the headlines were dominated by the health effects of Covid-19. Fast forward to June, July, and August, and the scale of the impact of the pandemic is becoming much clearer. Not only have thousands of lives been lost and key workers required to exert all their time and energy into saving lives and keeping the country running, but tens of thousands of jobs have been lost and some are struggling to make ends meet. Statistics from Virgin Money suggest that 8 million people have sought advice to help with debt since the beginning of the crisis (source).
Household incomes – UK Consumer Debt After Covid-19
The Institute of Fiscal Studies suggests that there was a 20% decrease in national income in April 2020 (source). While some people continued to work, switching from offices to kitchen tables and makeshift studies in spare rooms, others were unable to work. Over 9 million UK employees were placed on furlough, with the government scheme covering 80% of wages up to a maximum of £2,500 per month.
Over 2.5 million people in the UK claimed unemployment benefits between March and July. IFS figures show that household incomes were 8% lower in May 2020 than predicted statistics before the outbreak hit. This equates to around £160 per household. The poorest households were hit hardest in terms of income loss, but when support measures and benefits were added to the total income, there was little difference between poorer and more affluent households.
Paying back debt – UK Consumer Debt After Covid-19
Initially, there was an increase in debt repayments, with UK households repaying a record £7.4 billion in April 2020 (source). During the toughest part of the lockdown, when social activities were restricted and most people were only allowed out to work or take daily exercise, spending decreased, and some took the opportunity to pay off credit cards and reduce debts.
Sadly, not all households have been able to use funds to try and clear debts. For many, the pandemic has contributed to an increase in personal debt caused by losing income and having to rely on safety nets and support initiatives introduced by the government and financial organizations, including mortgage holidays and breaks in paying back personal loans and credit cards. According to Virgin’s survey, 1 in 8 of the 4,000 participants had taken advantage of a mortgage holiday or a pause in paying off a loan or credit card (source).
Increasing levels of consumer debt
Research indicates that non-payment of bills increased in April and May 2020. The number of households making payments for mortgages fell by 14% and there was also an 11% decrease in rent payments and a 9% fall in council tax payments (source). In many cases, individuals have opted to take breaks, for example, mortgage holidays, which provide short-term relief. UK debt charity, StepChange estimates that each affected adult has amassed an additional £1076 in arrears and £976 in personal debt as a direct result of the pandemic.
The charity believes over 4 million people have borrowed money since April (source). At present, IFS figures suggest that the average UK household has £8,000 of unsecured debt, but this is likely to rise, especially among low-income households. While high earners will probably be able to continue paying off credit cards and loans and covering mortgage payments, there is a concern that those on low incomes will be unable to cover repayments and may therefore incur additional penalties and interest fees. There is also a risk of people borrowing more money, potentially on unfavorable terms, to make ends meet in the aftermath of the pandemic.
Debt after Covid: What does the future hold?
The Covid-19 pandemic took the world by surprise, and nobody was really prepared for the scale of the outbreak or the disruption it would cause to our global economies and the way we live. At the moment, it’s impossible to say what will happen in the coming months, but governments and health experts all over the world are urging people to be cautious and to be prepared for a second wave.
For the economy, there are signs of recovery, with businesses reopening and people spending more, but it could take months, even years for the situation to improve significantly, and it won’t be possible to save every job or keep every company afloat. Job losses are being confirmed in the headlines on a daily basis, and this will undoubtedly have an impact on personal debt and the ability to cover household costs, but also to pay off existing debts. Another concern is the level of support available for those who are struggling. The furlough scheme cannot run forever, and there are changes due to come into play in October, and banks and lenders may stop offering mortgage and credit card payment holidays. For people who are already finding it tough to put food on the table or pay rent or a mortgage, the future is a daunting prospect.
Some people have been able to save money during the lockdown, but for many, the Covid-19 outbreak has contributed to financial anxieties. People have lost their jobs or seen their income fall, and this has resulted in borrowing money or using temporary schemes to cover household costs. Personal debt is expected to increase in the months to come, especially if the economy doesn’t recover quickly and unemployment rates remain high as a result of the pandemic. Initiatives like mortgage holidays have provided relief for many, but they only delay the inevitable and there are genuine concerns that the UK could face a personal debt crisis in the future.