Will personal debt become unmanageable when IR's rise ?

ad9898_3

Low IR's are containing the debt issue for many at the moment, I know one person personally that will be almost certainly repo'd if base rates rise (he's on a SVR with Northern Rock at the moment). Just what kind of problems are likely to be unleashed if or should I say when rates rise.

Or, do many think that the current gap between base rate and lending rate will be reduced when the base rate goes up ?, leaving lending rates pretty much unchanged.

Treadmill

Mortgage rates are higher now than when the base rate was 3.5% in 2003, I think the banks will absorba few rises.

purch

Just what kind of problems are likely to be unleashed if or should I say when rates rise.

Stick with IF

Reaper

Even if they do rise I don't expect it to be a major problem. I doubt that most people have been adding to their debt because they feel insecure.

The only ones who are vulnerable are those who have been made unemployed. Currently unemployment stands at 6.77% of the work force compared to 5.2% this time last year. Source

So provided rates do not rise beyond what they were before the recession only 1.5% of the workforce are any worse off now than they were then. Plus everybody has had a "holiday" period of low rates to get their finances in order.

Of course if unemployment keeps rising the number of people who maybe at risk of being overwhelmed by debt will grow too.

Personally I think the BofE will find their hands tied and unable to raise rates when they want to because we will still be in recession when inflation arrives.

IveSeenTheLight

Personally, I wont.

The only debt I have is my mortgages and I have been paying them down dramatically.

While I should have had 19 years and 22.5 years still to pay if I had kept at the standard 25 year mortgage, I'm now looking to clear both in 8 years time.

With a recent poll (see the other thread) showing expectations for IR to be at 0.5% for another full year and likelyhood is that it would take another 6-12 months to return to the 5.75% it was before, I personally will pay down a lot more of that debt in that time.

Hopefully everyone else will also take this period to clear off any debt they have.

Then when interest rates rises, there might not be such a problem that some [strike]hope for[/strike] foresee

ad9898_3

IveSeenTheLight wrote: »

Personally, I wont.

I don't really think anyone who posts regularly on this board would be in any kind of trouble, we are not really that sympathetic to over indebtedness here, but my OP was in general, the personal debt out there is by far the largest amount in history, it was initially started by low rates and bad lending, my view now is the low rates are just about keeping the finger in the dam.

wolvoman

1. BoE rate needs to rise to at least 3% or so before current SVRs start to match the SVR rates pre-credit crunch.

2. The spread between bank base and SVRs will likely narrow as the SVRs would become uncompetitive too quickly and lenders will want to resist losing too many from SVRs

3. Rising interest rates would indicate returning growth and therefore more risk appetite. This would lead to the return of more 90% LTV mortgages so would allow those who have lost some equity to remortgage.

4. As IRs have stayed so low for a while, many people have been paying off debts. This means they'll have a lower capital total to pay interest on when IRs rise and so help offset some of the rises.

IveSeenTheLight

ad9898 wrote: »

I don't really think anyone who posts regularly on this board would be in any kind of trouble, we are not really that sympathetic to over indebtedness here, but my OP was in general, the personal debt out there is by far the largest amount in history, it was initially started by low rates and bad lending, my view now is the low rates are just about keeping the finger in the dam.

It would be remiss of me to speculate as to the personal financial situation of persons which I have absolutely no idea their financial position.

In response to your personal opinion, what is your opinion that there was less people defaulting on the debt 2 years ago than there is now?
Surely by your statement, you think that these people should have been saved by low interest rates.

My opinion on personal debt is that if you can't afford something, don't buy it.
When I was younger and less knowledgable I got into bad debt and it was an impotrant lesson. It taught me to work hard to clear that debt and ensure I did not get into debt again.

Now my only debt is my mortgages, which unfortunately is a debt that is unavoidable, but as stated, "I Saw The Light" and have been paying these off as fast as is reasonably possible.

Maybe the silver lining in this economic situation is that many more people "See The Light" and change their attitude to debt and credit

StevieJ

We have done this one a few times margins will narrow if rates increas.

Graham_Devon

As I stated on one of your threads yesterday, personal loans are going up, as are credit cards. Indeed, a card I have with egg has gone from 11.9% just before christmas and it's now after a couple of rises 21.9%. That's quite a large jump, which would put up payments a fair bit.

And a couple of facts, to show the problems here:

Average household debt in the UK is ~ £9,305 (excluding mortgages). This figure increases to £21,640 if the average is based on the number of households who actually have some form of unsecured loan.

331 people today will be declared insolvent or bankrupt. KPMG estimate this will increase to 411 people a day throughout 2009 or 1 person becoming bankrupt or entering into an Individual Voluntary Arrangement (IVA) every 3.5 minutes

Average consumer borrowing via credit cards, motor and retail finance deals, overdrafts and unsecured personal loans has risen to £4,860 per average UK adult at the end of May 2009.

More scary stuff here: http://www.creditaction.org.uk/july-2009.html

Notice the last paragraph, credit card borrowing etc is rising, not falling.

Really2

Graham_Devon wrote: »

Notice the last paragraph, credit card borrowing etc is rising, not falling.

Average consumer borrowing via credit cards, motor and retail finance deals, overdrafts and unsecured personal loans has risen to £4,860 per average UK adult at the end of May 2009.

Could that be the car scrapage scheme taking effect?