One of the great unanswerable questions of our modern age is what to do about the steady increase in global debt levels, especially for consumers. Take car loans. Anecdotally I’ve been picking up indications of a complete burn out in this specialised lending segment, with many PCP loan providers running up high levels of defaults. Put simply consumers have borrowed too much and the assets they’ve invested in are simply not worth what they thought they would be – partly as a result of plunging 2nd hand diesel prices. What’s true for car loans is doubly true for consumer lending where there’s a long series of banks (and online lenders) pumping out loans at single digit interest rates. For fun I recently checked out what £10,000 would cost me on the Marks and Spencers financial services website – the interest rate was 2.8% and I worked out that I could borrow incredibly cheaply and then reinvest the proceeds back in (risky) investments that yielded 5% at the very least. Needless to say, common sense kicked in at that point.
And of course, what’s true for consumer lending is doubly true for mortgages. My twentysomething relatives and in-laws are all now pushing affordability levels and borrowing vast sums of money. At the moment that debt is cheap – fixed rates of 2 to 4% seem common – but we all know it could change. Last but by no means least, there are the massed legions of students who (fairly) love to complain about debt levels, with many toting a figure of well above £50,000 before they finish university – although in truth they are actually paying something which is closer to a graduate income tax than a loan.
But the general point still stands. Credit is cheap and consumers are binging on it again. For many young people, this splurge is manageable as they’ll have decades to pay back the loans and hopefully inflation of 2 to 3% per annum will help erode the true liability.
But for many older people that promise of longevity isn’t realistic. A growing number of people in their fifties, sixties and even seventies are now racking up very high levels of debt – or failing to pay back existing debts. A good summary of this troubling situation can be found in a report released to coincide with Key Retirement’s launch of the Managing Debt In Retirement guide with independent financial expert Alvin Hall. This reveals that …
“Credit card and loan debt is preventing more than one in five over-65s from enjoying retirement as they struggle to maintain their standard of living with one in seven (14%) relying on credit cards to boost their income in retirement, new research* from leading over-55s financial specialist Key Retirement shows. The research found 26% of over-70s are juggling three or more credit cards and one in 10 have had a balance they’ve not cleared for more than a year.
The worry of debt in retirement is only going to get worse, with levels of both secured and unsecured debt held by over-65s on the rise. Since 2016 it has increased from £70bn to an estimated £85bn in 2018**. Secured debt such as mortgages accounts for £73bn and nearly 40% of 65-74 year olds with an interest only mortgage will struggle when the capital repayment is due**. “
Now one answer to this worrying rise of Silver Surfer debt is to open up the floodgates to relatively innovative forms of leverage – in Key’s case that’s equity release. I’ve long argued that we need a more innovative equity release market if we are to unlock the huge quantities of wealth trapped within our home.
Arguably though we’re only just making a bad problem worse – we’re forcing debt further into later age. Next stop inter-generational debt, as already practised by the Japanese. The problem of debt though remains. As a society, we are addicted to debt. Socialists like to blame the capitalist system for hooking consumers on debt whereas conservatives point to a narcissistic consumerist culture wrestling with excessive taxation levels. I’m sure there’s a kernel of truth in both views but it doesn’t really get us anywhere in solving endemic debt problems. We could, of course, abolish the whole capitalist system as Mr Corbyn suggests but we’d probably be facing a situation akin to Venezuela as a result. Equally, we could cut taxes back radically thus releasing extra cash flow but I suspect that we’d simply be transferring the debt burden to the government which would be running huge structural fiscal deficits – someone has to pay for essential public services. So, we’re left with more practical solutions. Regulators will try and limit access to debt for those who can’t afford to pay but this will simply spark protests and generate much complaining about unequal access of credit. We could also I suppose force stringent new banking regulations which limit leverage and curb lending – but the existing panoply of rules have done nothing to curtail most forms of asset-backed mortgage lending. The sharing economy might also help lower the fixed cost burden of many key living expenses, thus reducing demand for debt (think of all those unwanted cars).
Perhaps technology though will provide us with much more innovative solutions. I’ve long thought that one potential area worth exploring is the idea of risk sharing. This first had its airing in the Greek debt crisis when new forms of debt were suggested which only triggered payments if the economy grew by a certain amount. These ideas are already being mapped into the consumer arena – why not invest in students and their education? Loan them the money and then share in their success. Ditto for first time buyers – coninvest in a new property as well as sharing in the upside (and of course the risk on the downside).
If all this doesn’t work, two other big solutions suggest themselves. Let the populists lose, boost public sector spending, stoke up growth, give away money to people and then not worry too much about the ensuing bonfire of inflation. Or we keep interest rates low for decades to come. Tough choice.
More on that Key Retirement Report
“ Key’s guide aims to help people become retirement ready with clear advice on options for managing and eradicating debt. It also considers some of the pros and cons of boosting income by carrying on working as well as downsizing and releasing property wealth for homeowners. Key’s independent guide Managing Debt In Retirement is available by calling 0808 2080958 or visiting: https://www.debtinretirement.co.uk “