The rising cost of living is already putting a squeeze on household incomes, with the inevitable consequence that more people are turning to credit to finance some of their purchases.
The latest data from the Bank of England says that individuals borrowed an additional £1.3 billion in consumer credit in March, following £1.6 billion of borrowing in February. To put this in some context, the 12-month pre-pandemic average, up to February 2020, was £1.0 billion.
The additional consumer credit borrowing in March was split between £0.8 billion on credit cards and £0.5 billion through other forms of consumer credit (such as car dealership finance and personal loans). The annual growth rate of credit card borrowing is now 10.6% and, on top of this, UK Finance has reported that overdraft balances are on the rise.
So, people are taking on more revolving credit to help them negotiate the increased cost of living. But the cost of servicing this credit is also rising. Overdraft interest rates have surged since the start of the pandemic, rising from 20.99% in February 2020 to 34.07% in April this year, according to Bank of England (BoE) figures. While, the comparison website, creditcards.com says the national average APR on a credit card is currently 16.54%. Six months ago, it was 16.13%.
It’s highly likely, therefore, that you will have customers, who are currently struggling with monthly outgoings and the spiralling costs of servicing their revolving credit – and you may hold the solution. Because the right solution for many could be to pay off their unsecured debts and revolving credit by releasing capital from their home.
There are always considerations in converting unsecured debt to secured debt and potentially increasing the term over which the debt is repaid. But in the right circumstances, consolidating debts in this way can provide a vital lifeline for borrowers, reducing their monthly interest payments and giving them greater control over their monthly finances.
Consolidating revolving credit doesn’t just provide a way for customers to lower their monthly outgoings, it also provides a realistic route to becoming debt free as the balance will eventually be paid off if all the payments are made. Debt consolidation may have negative associations, but really, when used correctly it’s just smart financial planning – reducing the cost of servicing debt and eventually paying off the balance.
When it comes to choosing the right lender to for your customers, there are some things you need to consider. First, many lenders will include a maximum debt to income ratio as part of their affordability calculation, which could limit your customer’s ability to raise enough capital to clear their debts. This affordability is also likely to become more difficult as many lenders are starting to use revised ONS figures, reflecting the increased cost of living, as part of their affordability calculations. However, not all lenders take this approach and, at Pepper Money, we have no predetermined level of debt.
Some lenders will limit the LTV to which they allow debt consolidation, but again not all lenders. At Pepper Money, for example, we allow debt consolidation up to maximum LTVs.
So, if you want to help your customers who are being squeezed by the spiralling costs of living and servicing their debts, think about whether debt consolidation might be the right option for them, and remember to choose a lender that doesn’t unnecessarily penalise those customers who are taking proactive action.
Paul Adams is sales director at Pepper Money
