Why is personal DEBT so high in this country?

neverdespairgirl

SingleSue wrote: »

I personally feel university should not be about the social side experience but about learning...but then I was always a boring begger.

I think it's both, and they are both important.

Pobby

Having a few bob in the bank is a good feeling. I have tried to save a lot of my income over the last few years. There is nothing wrong in being frugal. I have got to a point where I don`t like "things". Before I buy anything now it has to pass the "will I use it" test. Being an avid cook we have in the past bought stuff for the kitchen that has rarely seen the light of day. Not any more. I am going to spend a bit shortly. Our 20 year old plus sofa has fallen apart and a couple of new carpets are required. I will be holding the folding to see what cash deal I can get.

barnaby-bear

Conrad wrote: »

Would it be equally funny if a person with a hearing impediment couldn't speak as well as your good self?

Spelling and gramaaaaaa sucks

The point is these are people BOASTING of their superiority and intellectual capabilities and they can't *spell* INTELLECTUAL.... my spelling and grammar is rubbish but I'm not the one being snotty about the television choices of others....

treliac

neverdespairgirl wrote: »

I think it's both, and they are both important.

People have friendships they made during university that last throughout life. My DD has made many new friends, especially one who I reckon she will keep into the future. It's a highly charged and emotional time, when they leave their comfort zone, possibly for the first time, and the support of new friends takes on new meaning and priority.

Previous friendship groups were narrower and probably restricted to those few, from similar social backgrounds, that were around during school and growing up. Equally important and likely to be long-lasting, but equally part of the comfort zone.

davilown

Personal debt is so high because people (me included) though that we could pay it off quickly, because of rising wgaes. It was readily and easily available. In reality, we borrowed far too much to be able pay back and will end up either paying offlong term or going bankrupt.

I've made this mistake but have also spent the last three years paying off nearly £22k. £6.5k to go and them my savings plan will kick in.

I will probably never buy on any form of credit again, except perhaps on a small mortgage (well maybe a fridge from currys on ten months payment:rolleyes: ).

EdInvestor

Of course personal debt is what we think we know most about, but it isn't really the root cause of the credit crunch.That's down to a misunderstanding in the banks about risk.

I said earlier that the switch to a low interest rate/low inflation economy was a fundamental factor. We know what happened as a result on the personal (retail) side, but this was balanced by similar action on the institutional (wholesale) side.

When cash interest rates and bond yields fell so low in response to low inflation, all those people who are looking to park their money somewhere and get an income - especially the insurance companies and pension funds who pay out income to retirees, started to look for alternative places to put their money which paid higher rates.They wanted something that was still pretty safe but paid more than cash or gilts.

One obvious candidate for expansion was the asset backed securities market, which had been around since the 1930s. Banks would take packages of mortgages, or credit card and loan repayments, and sell them off to investors - with the interest payments being made by the borrowers paying the "coupon" income to the investor.

This actually looked very neat: the securitisation of the loans enabled the banks to take them off the balance sheet, thus freeing up their ability to lend more (and make more profit), while the 'recycling" of the interest payments into income for pensioners solved the underlying inflation/low interest rate problem in that area. A win/win, it seemed

But then along came some boffin, attached to a computer deep in the bowels of a bank (whoever it was should be taken out and shot!) went a bit too far. He decided that banks would be able to sell far more of these packages of asset-backed securities if there was less risk involved.

So rather than bundle all the prime mortgages together into a security with a AAA rating, but which would have a lowish yield because it was pretty safe, why not mix together some prime loans, some medium safe ones, and some sub-prime loans. Such a package might not be as safe, but could be sold at a higher yield , and the bank would make more money. The high risk loans would be offset by the low risk loans, so investors would be happy.

And so it came to pass, and such bundled mixed-up loan packages were sold all over the world for several years.

Until people started to default on US sub prime mortgages.

This prompted banks and pension funds to start to look at the packages of loans they had bought in more detail. They realised they had no idea how much of the package was good stuff, and how much was rubbish.Rather than reduce the risk, the combination packages had greatly expanded it, as no-one really knew exactly how the packages of loans were made up. This effectively meant the value of the assets could be zero. :eek:

And of course the ratings were now meaningless. Since banks had no idea how much of this junk was on each other's books, they had no idea if other banks were solvent or not. So they stopped lending to each other. So the money markets froze up, leading to the credit crunch.

The amount of money we are talking about here is massive, way beyond anything in the household sphere.So there's not really much that ordinary individuals can do about it - it's clearly a global Government matter which will take some time to unravel.

Meanwhile the UK Govt needs to help banks to keep lending to real businesses and consumers so the normal economy can go on, people don't lose their jobs etc.while this is all sorted out.

As far as house prices are concerned, they needed to moderate from 2007 levels, but the fundamental factor underpinning prices is that earlier switch to low inflation and low interest rates.That looks unlikely to change, so the idea that we should go back to prices prevalent in the 90s is misconceived IMHO.

In the same way as there has been a one-off ratchet downwards in annuity rates (remember when a 100k pension fund bought you a 10k income?Now it's 6k) there has been a one-off ratchet upwards in house prices.Although there is always the possibility of a temporary overshoot on the downside, that one-off change is very unlikely to reverse in the long term.

So if I was a home-owner wannabee who could get a cheap mortgage, and found a suitable property at around the price it cost in 2004-05, I would consider buying for the long term. In quite a few areas you may well find that prices didn't rise much beyond 2004-05 levels anyway. That tells you the maximum local affordability level.Stick with that and you shouldn't go far wrong.

Walletwatch

Spot on, EdInvestor, and this is a point that is often missed when commenting on the global financial crisis. While people who have overextended themselves and got into crazy borrowing and MEWing beyond their means have only themselves to blame if they come into bad times, they cannot be necessarily held responsible for precipitating the actual crisis. The global credit crunch and the ensuing recession is undoubtedly due to the genesis of dangerous financial instruments that were allowed to expand beyond controllable limits.

A phrase from a recent letter of confession from the ex-Chairman of Satyam Computers, the recent Indianised Enron debacle comes to mind - 'it was as if these financial engineers working for these savvy investment banks were riding a wild tiger - they could not get off without risking being decimated by the tiger (the very financial derivatives that they had created)

Pobby

Thanks Ed, great post. That`s where we have got caught out. Annuities. We had planned for £15k a year and at best that`s halved. Any chance of annuities going up again?

Hectors_House

ad9898 wrote: »

Look at all that MEW, follows the house price graph perfectly from 2001-2007. People thought they were wealthier, yet in reality, they just had more debt.

Really, how could people be so stupid.

I work with someone in their late 30's who wanted to move to a bigger home but couldn't afford the ever-eascalating prices (plus had no savings to pay for legal costs etc).

They decided to stay put but release equity in their house - new bathroom, new kitchen etc.

Like the rest of us here he's now waiting to find out at the end of this month if he still has a job.

It can only be that the man in the street thought the value of his house was going to increase forever and didn't see the recession coming.

Another friend inherited some money and went on a leveraging spend-a-thon buying BTLs.

Again, when he started to have long void periods and those folks who did view telling him he was asking too much rent it was a surprise to him.

I'd been warning him for at least two years that this would happen but he brushed it off, believing because he'd never taken on tenants that were unemployed that he'd never have to.

I think we are all in for some harsh lessons, and unfortunately anyone that didn't take part in the debt orgy will be dragged down too.

But we can only hope a better society evolves out of it all.

SamIAm_3-2

As someone who has personal debt at levels probably higher than most I can describe how I fell into the trap.

I left university in 2000 with a large amount of debt from student loans, overdrafts and credit cards. The loans went on paying university fees and rent. The overdraft and credit cards went on socialising and on items I couldn’t really afford. Combined, the total debt amounted to around £17,000.

Prior to university, although I had a Saturday job at Sainsbury’s, I didn’t understand the concept of earning money and the importance of spending only what you can afford. This coupled with the fact that credit was so easy to obtain (the banks were literally throwing the money at you) led me to naively spend all the credit I could get through University.

After University I immediately got a job to start paying off the interest payments of my large financial commitments. It was only then that I realised how much the interest was crippling me. At this point I made an effort to pay off my debts as soon as I could (it took me 4 years) and after this I vowed never to get into debt again (with the exception of a mortgage to purchase a house).

I spent the next 3 years saving as much money as I could in order to put a deposit down on a house.

At this point I started looking at lenders for a mortgage and I was disturbed as to how much money the banks were willing to lend, typically about 5x my salary. One lender was willing to lend 7 (yes, that’s a seven) times my salary at the time. Frankly I was shocked since working through the numbers meant that my _entire_ net salary would go on mortgage repayments with nothing remaining for food, travel, bills etc. Needless to say I turned down the offer – in fact I have vowed never to use this lender in the future.

By the time I scraped the deposit together it was 2007 and house prices were rapidly increasing in South London, the only realistic location for commuting purposes for my girlfriend and I. I confess that there was an element of panic buying – I felt I had to buy then otherwise I would never “get on the property ladder”.

I ended up with a mortgage of 4.25 times my salary with a 10% deposit. I fixed (and I still don’t regret this decision) because I realised that this was the limit of what I could afford and if interest rates went up I would be in trouble. The plan was that some of my investments would mature and I could use this to pay off some of the outstanding amount when my fixed period finishes.

The long-winded point is that despite lessons I had thought I had learned 4 years ago I still managed to accumulate a large debt which, although I can afford to pay at the moment, may turn out to be a big mistake.