Are Bad Credit Loans Contributing to Our Massive Debt Loads?

Consumer debt has become the norm in today’s society. It seems everyone from all age groups and all backgrounds has some sort of debt. Millennials from middle-class households will have thousands of dollars in student loan debt. Middle-aged heads of households will have mortgages and lines of credit debt. Retired seniors may suffer from credit card debt or payday loans.

Unfortunately, it is debt repayment that is the biggest burden to households, says a new report from Trades Union Congress (TUC) and Unison, two national trade federations, entitled “Britain in Red.”

According to the study released Monday, the number of households in the United Kingdom struggling with growing debt problems rose by one-quarter between 2012 and 2014. This prompted households to borrow since their wages weren’t significantly edging upwards.

Low-incomes, self-employed professionals, and youth recorded the largest gains in debt.

debt-servicing the debt was one of the biggest obstacles for consumers across the country. By 2014, 3.2 million families, up from 2.5 million in 2012, we're spending a minimum of 25 percent of their gross monthly pay on servicing unsecured debt. Moreover, 1.6 million households were allocating 40 percent of their gross income to repaying debts.

Using data from an annual report by the Bank of England, borrowing on overdrafts, payday loans, and credit cards has continually gone up and failed to return to pre-recession levels. A big contributing factor to this increase is the availability and ease of access to bad credit loans. There are hundreds of new lending websites popping up online every day. With that being said, the report authors note that a drop in real wages really meant the debt-to-income ratios stayed high.

The number of low-income families spending more than one-quarter of their income on debt repayments jumped nearly double from nine percent to 16 percent. The 18-to-34-year-old demographic experienced a substantial increase from two percent to 10 percent. One would surmise that it’s because of student loans, but it’s actually due to credit cards, payday loans, and overdraft borrowing.

From the start economic collapse to the summer of 2014, the bad credit loan lending market experienced an immense boost due to the credit crunch. Despite the regulations imposed on the multi-billion-dollar industry, the study authors purported that borrowers spent a greater portion of their income on repayments of payday loans.

All of these are ingredients to an unhealthy economy, says Frances O’Grady, TUC’s general secretary.

“Rising household debt is not the sign of a healthy economy. People raiding their piggy banks and borrowing more than they can afford is what helped drive the last financial crash,” O’Grady said in a statement “We need a wages-led recovery that works for everyone, not another debt-fuelled bubble.”

Dave Prentis, the TUC’s general secretary, had an even more dangerous warning: it will take years for numerous British families to return to pre-crisis normals and have their finances become better.

“Wages might finally be picking up for those in the private sector, but anyone working in health, education, local government, and our other public services still has many more years of pay restraint to survive,” he said. “And soon to be introduced cuts to tax credits will push many low-income families yet deeper into debt.”

Earlier this year, a report conducted by PwC entitled “Precious Plastic: How Britons Fell Back in Love With Borrowing” found that the average British household will owe about £10,000 ($15,000). This hefty amount is in relation to an array of personal debts, like credit cards, overdrafts, auto loans, and payday loans.