"Combining all loans into one single monthly payment could reduce the interest rate they are paying – especially if they are spreading the cost over a longer period of time."
While savers may have been thankful for the August increase, for those with substantial unsecured debt, the rise risks piling further pressure on their finances as the cost of borrowing continues to creep up.
A staggering £1bn was spent on credit cards in June this year, up 12.5% on 2021 and marking the largest annual growth rate in credit card lending in almost seventeen years.
The Bank of England’s June Money & Credit Report paints an alarming picture of UK borrowers’ reliance on credit and this is before we have moved into the worst phase of the cost of living crisis.
Not only was a billion pounds spent on credit cards but an additional £0.8bn was also borrowed through other forms of consumer credit such as personal loans.
A total of £1.8bn was therefore borrowed in June – double that of the £0.9bn in May. This figure is also significantly up on the 12-month pre-pandemic average of £1bn.
The annual growth rate for all consumer credit was 6.5% in June; the highest rate since May 2019.
As the interest rate rises, so too does the cost of such borrowing. Rates on new personal loans increased by 22 basis points to 6.71% in June. The BoE’s figures show rates on-interest bearing credit cards increased by 19 basis points to 18.56% up from 18.37% in May. This now sits one basis point above the February 2020 level.
For borrowers who are already stretched financially, any rise in monthly payments risks making their debt even more difficult to manage. For homeowners – especially those who may have built up equity in their property – however consolidating some of their debt through a second charge mortgage may reduce their monthly payments and help them better manage their finances.
Combining all loans into one single monthly payment could reduce the interest rate they are paying – especially if they are spreading the cost over a longer period of time.
While a second charge might not be suitable for all borrowers, for homeowners with a substantial amount of debt, it’s important they consider all options to make sure they are on as strong a financial footing as possible.
Although many borrowers are already feeling the pinch, we are arguably still in the calm before the storm in terms of the cost of living crisis. The increase in energy bills alone will be enough to push some struggling borrowers further into the red.
Consultancy firm, Cornwall Insight, has warned that energy bills for a typical household could hit £4,266 annually for the three months to March 2023. Add to this growing inflation and fuel prices and those already relying on credit to fund day-to-day living expenses will feel the strain.
There will also be those borrowers who are struggling with debt that stretched back to the pandemic.
While consumer debt dropped during this period, we saw the wealth gap widen and households with unsecured credit were generally more exposed by the Covid crisis, analysis from the BoE shows.
While wealthier households tended to accumulate savings and may have been able to pay down debt, lower to middle-income households saw their income fall more persistently and may have needed to take on additional debt to manage spending commitments, the Bank’s findings show.
Many such borrowers will have accumulated the debt with the aspiration of paying it back when the economy improved.
As the likelihood of a recession looms however, the financial situation of many is likely to worsen further still. For homeowners with a large amount of unsecured debt, using a second charge to consolidate their outgoings could be beneficial and it’s an product solution that consumers and their advisers should continue to explore.
