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Cut up that #creditcard: debt will get more expensive soon

cutup creditcardI found a strange business card on the table in a London pub the other day. It was advertising a venue where you pay to go into a room and break stuff: plates, crockery and so on. Only £19 for 30 pieces! It helps vent frustration, apparently. It seemed funny until I thought about it. There must be a lot of money washing around if people are happy to pay for rubbish, literally. It’s also a wake-up call because this kind of excess is what tends to happen when the economy’s going gangbusters. And when there’s a boom, a bust is never far behind.

Cast your mind back to 2008. Banks going bust, homes being repossessed and whole countries (ie Greece) going down the pan. Blame was apportioned here, there and everywhere but, in my humble opinion, the whole pyramid scheme started because banks targeted people with no income or jobs with huge loans to buy houses. Debt that they could never hope to repay. And, scarily, that kind of practically free credit bonanza is happening all over again.

There’s a few interesting figures to back this up. Personal borrowing in 2017 is now at a higher level than before the 2008 crash. Did you also know that there hasn’t been a rise in interest rates for 10 years? (Thanks to finance firm Hargreaves Lansdown for pointing that out.) Borrowing has been getting cheaper and cheaper for a decade. And have you noticed all those shiny new cars on the road? Most are now sold using PCP (personal contract purchase) loans which require monthly payments for several years to start. At the end of the contract, you pay off the outstanding debt to buy the car or return it to the dealer. The trade relies on second-hand car prices to remain strong. Dealerships have been caught flogging PCPs to sick and unemployed people (see here), which the financial regulator has condemned as ‘irresponsible lending’. Doesn’t it all sound familiar?

The authorities have to get on top of it this time. Their main tool for controlling the economy is to make debt more expensive by putting up interest rates. If they’re going to head off disaster, it needs to happen soon. So bear that in mind when you’re booking next year’s holiday or thinking about a big-ticket purchase. Do you really need it? Can you actually afford it? Because, if the gloomy situation I’ve outlined comes to pass, your new toy could end up costing more than you thought.

See the SMM guide to getting out of debt here.

 

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Monday, 17 December 2018