Britons turn to loans to cover basics as cost of living crisis bites
Growing numbers of UK households are likely to turn to credit cards and loans “to plug the gap between their income and outgoings”, as winter sets in and energy bills increase, a leading debt charity has warned.
Higher mortgage payments and rent increases, as well as the rising cost of food and energy bills, could also force householders who have never been in debt before to borrow to make ends meet.
“It’s important to be aware that using credit particularly to cover essential spending carries risk, especially for someone with less financial resilience who may find the only option available to them is high-cost credit,” said Sue Anderson, spokesperson for debt charity StepChange.
The Bank of England hiked interest rates by 0.75% to 3% on Thursday – the biggest single rise since 1989 – meaning that thousands of households will see their mortgage payments go up. Banks and other lenders are likely to use the opportunity to increase the cost of other loans and credit cards.
Jane Tully, director of external affairs and partnerships at the Money Advice Trust, agreed with Anderson.
“With incomes for millions of people already unable to keep up with rising prices, more people are having to turn to credit to cover essentials.”
One in five new StepChange clients asking for help now cite the cost of living as the main cause of their debt problems, the charity said.
It has overtaken unexpected loss of income due to ill-health and redundancy as the biggest factor for people seeking support with their debts, as rising living costs mean they are struggling to make ends meet.
The advice charity said so far it has not seen an increase in clients’ debts but this was a risk as the cost of living crisis intensifies over the winter.
Victor Trokoudes, chief executive of savings app Plum, said: “Most households haven’t seen the impact yet of higher interest rates on their mortgages as they remain locked into fixed-rate deals.
“As more and more households come to remortgage, it will add even more pressure to people’s budgets, which may cause despairing households to turn to additional unsecured borrowing. While demand for credit is expected to increase, it might be harder for many people to get traditional products such as loans and credit cards approved,” he said.
“Since the global financial crisis, banks have strong affordability criteria in place,” Peter Hewlett, fintech leader at PwC, said. “This means those who historically may have depended on credit in an emergency, may find approval for a loan or credit card more difficult.
“We do expect that use of other payment options, such as ‘buy now, pay later’, or payments being split across multiple months will be heavier for this reason as people try to reserve funds for essentials.”