Charities have warned that Britain might find itself in a debt crisis because of increased borrowing by low- and middle-income households to cope with the ongoing job crisis.
Research by leading debt charity Stepchange indicates that that household borrowing has increased by 66% since May. Furthermore, almost 1.2 million people are in debt – double the number since March – with another 3 million people at risk of falling into arrears after taking short term loans.
*Starling Bank will not charge you withdrawal or currency conversion fees, but some ATMs may charge a fee.
**On top of this amount, some ATMs may charge a fee
Chief Executive of Stepchange, Phil Andrews voiced his concerns, saying “This report paints a picture of a nation sleepwalking into a debt crisis. Despite a bold initial reaction to the pandemic, the government and financial services sector’s toolkit of responses has not evolved, and the result is a spiralling number of people being plunged into debt due to Covid-19. And the worst is yet to come.”
Indeed, research by the Joseph Rowntree Foundation and Save the Children corroborates the evidence of an increasing number of families turning to lenders to sustain themselves during the economic crisis. Per their research, around 70% of families have had to make drastic changes to their diet and daily lives, while around half of them have fallen behind on household bills. Additionally, close to two-thirds of them have been unable to survive on Universal Credit alone, and have had to borrow money to stay afloat.
Stepchange’s report further highlights the insufficiency of current safety nets like Universal Credit, which has previously come under fire for not providing enough support to struggling families. Under Universal Credit, initial payments can reportedly take up to five weeks to arrive, which can push vulnerable people into the hands of loan sharks and payday lenders, driving them further into debt. The report suggests that of the applicants for Universal Credit since March, 24% are in severe debt and 28% show signs of financial difficulty.
An economy in crisis
The second nationwide lockdown is likely to worsen the debt issue since reduced hours and closure of workplaces means that a large number of people who cannot work from home will likely be furloughed or made redundant. Stepchange’s report indicates that 14.9 million people, representing 29% of the adult population, had suffered a blow with their finances by losing their jobs or being put on furlough. The self-employed sector also took a similar hit as entrepreneurs had to cope with pay cuts and delayed payments from clients.
With more people becoming unemployed, the government needs to urgently provide a support framework for those whose finances have been affected. Rising energy bills, reduced hours, and increased COVID cases are likely to extract a further toll on the economy. Unless decisive action is taken, any signs of sustained recovery could be further delayed well into 2021.