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Consumer debt defaults set to rise 17% by 2020
Published on 02/02/2016

Rise in consumer borrowing coupled with higher interest rates will fuel a 17% increase in households in default by 2020

  • The rise is expected to see an additional 700,000 households default (increasing from an estimated 4 million currently to 4.7 million by 2020)
  • The rise follows a period where lower interest rates have handed borrowers an estimated windfall of £34 billion a year (£1,300 per household per year)
  • If the Bank Rate is just 0.5% higher than expected over the whole forecast period, defaults would rise by 24% by 2020, with the number of households in default reaching 5.0 million

Consumer debt defaults will rise by 17% over the next five years according to FTSE-listed Arrow Global, which today releases the results of the first ever econometric forecast of consumer debt defaults. The forecast correlates the default triggers of unemployment and interest rates to existing government predictions of consumer debt levels. It has been carried out by Arrow Global as part of a major report to be published in full later this year called ‘Debt Britain: The Big Picture'.

The consumer debt burden has reduced over the last seven years, with government data showing a fall in the debt to income ratio from 145% in 2008 to 120% by H2 2015. However, a cyclical rise in consumer debt is now underway as the economic recovery matures, underpinned by growing consumer confidence and strengthening financial institutions.

The government's Office for Budget Responsibility (OBR) forecasts a £640 billion increase in consumer debt by 2020, a rise of 37% and an extra £24,000 for every household. Unsecured credit is expected to be the fastest growing component, increasing by 49% (£8,000 per household) by the end of 2020. At that point, net consumer lending will be running at a record level of £142 billion and the consumer debt to income ratio will exceed 160%.

Debt defaults set to rise as consumers borrow more
New econometric analysis by Arrow Global of the key drivers of default (interest rates and unemployment) with the OBR forecasts for consumer debt, interest rates and unemployment, projects a rise in debt defaults of 17% between the first half of 2015 and 2020 respectively. This rises to 20% from the expected lows in defaults in the first half of 2016. As a result, the number of households in default on their payments is expected to rise from 4.0 million in H2 2015 to 4.7 million in H2 2020.

The Arrow Global forecast reflects the normal cycle in defaults. This tends to follow the economic cycle with a lag, with defaults rising once consumers have had the confidence to take on more debt and lenders have had the confidence to increase lending and broaden the range of consumers they will lend to. Arrow Global has also examined the impact of interest rates rising faster than the OBR prediction. Its analysis reveals that if the Bank Rate is 0.5% higher over the whole forecast period, defaults would rise by 24% between the first half of 2015 and 2020, with the number of households in default reaching 5.0 million by 2020. Alternatively, if the Bank Rate rises 0.5% lower than predicted, the number of households in default will rise by only 10% to 4.4 million (Figures 1 and 2).

Figure 1: Projected number of households in default (millions)

1

Source: Arrow Global loan default model

Figure 2: Arrow Global forecast of consumer loan defaults for current OBR Bank Rate rise predictions 

 

Defaults (mn) OBR
interest rate forecast
Defaults (mn) OBR
rate forecast plus 0.5%
Defaults (mn) Relative to
base
projection
Defaults (mn) OBR
rate forecast minus 0.5%
Defaults (mn) Relative to
base
projection
2015 H1 4.0 4.0 100.0 4.0 100.0
2015 H2 3.9 3.9 100.0 3.9 100.0
2016 H1 3.9 3.9 100.0 3.9 100.0
2016 H2 3.9 3.9 100.0 3.9 100.0
2017 H1 3.9 3.9 100.0 3.9 100.0
2017 H2 4.0 4.0 100.0 4.0 100.0
2018 H1 4.1 4.1 100.0 4.1 100.0
2018 H2 4.2 4.4 106.3 3.9 93.7
2019 H1 4.3 4.5 106.2 4.0 93.8
2019 H2 4.4 4.7 106.1 4.1 93.9
2020 H1 4.5 4.8 106.0 4.3 94.0
2020 H2 4.7 5.0 105.9 4.4 94.1


Most problem debts are modest and stable
Analysis by Arrow Global of its management information reveals that the typical amount owed by its customers who have previously defaulted is relatively modest and is very stable at around £2,500 (Figure 3). This suggests that while the volume of consumers in default may be set to increase over the next five years, this does not mean that the value of a typical default will rise in the same way.

Figure 3: Average amount owed by Arrow Global customers

  Average credit card debt Average unsecured debt (credit card, loan, overdraft and store card)
2010 £2,352 £2,822
2011 £2,365 £2,615
2012 £2,516 £2,691
2013 £2,427 £2,340
2014 £2,422 £2,345
2015 £2,528 £2,411

Source: Arrow Global's management information

Mortgage possessions and personal insolvencies could rise from current lows
Arrow Global's analysis also reveals the impact of rising consumer debt and higher interest rates on mortgage possessions and personal insolvencies (Figures 4 and 5). These two measures reflect the impact that debt defaulters could face if they fail to make good their debts. Arrow Global's analysis predicts mortgage possessions to increase by 9% from a low of 10,400 in 2016 to 11,300 in 2020 (a rise of 900) and personal insolvencies to rise by 3% between the low of 78,100 in 2016 and an annualised total of 80,200 in the second half of 2020 - a rise of 2,100 annualised. Although these series remain below their previous peaks, this will be the first sustained increase in eight years.

Figure 4: Arrow Global forecasts of mortgage possessions                

2

Source: Arrow Global loan default model

Figure 5: Arrow Global forecast of personal insolvencies

3

Source: Arrow Global loan default model

Tom Drury, Chief Executive Officer of Arrow Global comments:
"Low interest rates and reduced lending have led to a fall in the consumer debt burden since the financial crisis. However, the recent upturn in consumer confidence means this trend is ending as overall lending increases and as interest rates rise, defaults will start to increase from their current low levels.

 "The rise in the number of individuals in default will make professional debt management all the more important for both lenders and the borrowers in difficulty. The consumer debt industry needs to work closely with advisory consumer bodies now to plan for this rise, so borrowers in difficulty are given the best advice and help in managing their finances."

The debt burden has fallen over the last seven years
The forecast rise in the level of debt defaults follows a seven-year period in which the debt burden has fallen. Although the overall level of consumer debt in the UK rose to a record £1.44 trillion at the end of June 2015, the debt to household income ratio is down to 120% from its peak of 145% in 2008. Total interest payments also fell from 9.3% of disposable income in 2008 to just 4.8% in 2014. Arrow Global analysis of the data reveals that lower interest rates have cut the consumer interest bill by £34 billion between 2008 and 2014, from £90 billion to £56 billion, saving the average household £1,300 a year through this period.

Government data (Department of Business, Innovation and Skills (BIS)) shows that 85% of consumers have met all their debt and bill paying commitments, suggesting the vast majority of consumers use debt responsibly. Furthermore indications of stress have reduced significantly since the financial crisis. BIS data shows that individual insolvencies fell by 48% between their peak in Q4 2009 and Q2 2015. Mortgage arrears fell 46% between 2009 and 2014. Debt write-offs by banks and other lenders have also fallen sharply.

 

For further information:

Arrow Global                                                   +44 (0)161 242 5896
Alex Barnett
Paul Fitzjohn

Instinctif Partners                                             +44 (0)20 7457 2020
Laura O'Connell
Louis Auty
Louis Supple

About Arrow Global
Arrow Global is one of Europe's largest and fastest growing providers of debt purchase and receivables management solutions. We purchase customer accounts from a range of businesses, including retail banks, credit card and telecommunications companies. The Group manages over 8.5 million customer accounts with a total face value of £13.5 billion.

Arrow Global works closely with customers whose debts we acquire to find affordable repayment plans based on their individual circumstances.  Arrow Global does not charge customers interest or fees on defaulted debt, unless there is a statutory requirement, in effect freezing the amount they owe.

Through representation on industry bodies such as the Credit Services Association and SCOR (The Steering Committee on Reciprocity), the executive team plays a key role in initiating, shaping and implementing industry compliance standards and programmes.

In October 2013, Arrow Global listed on the London Stock Exchange (ARW) and is authorised and regulated by the Financial Conduct Authority (FCA).

Notes to editors
This release reports some of the findings in the Arrow Global report "Debt Britain: The Big Picture", a major analysis into the state of personal indebtedness in the UK and the consumer debt industry, which will be published in full later this year.

Figure 6: Arrow Global forecast of consumer loan defaults for 0.5% above and 0.5% below current OBR Bank Base Rate predictions

4

 References and information sources

Report author
This report was authored for Arrow Global by Rob Thomas, Director of Research at Instinctif Partners and formerly a Bank of England economist, high profile analyst at the investment bank UBS and senior policy adviser to the Council of Mortgage Lenders (CML). Rob was also the project originator and manager at the European Mortgage Finance Agency project and created the blueprint for the Government's NewBuy mortgage scheme.

References

Consumer credit and consumers in vulnerable circumstances Financial Conduct Authority, April 2014
Credit, debt and financial difficulty in Britain, 2012 Department for Business, Innovation and Skills, June 2013
Economic and fiscal outlook Office for Budget Responsibility, July 2015
Household debt and spending Philip Bunn and May Rostom, Bank of England Quarterly Bulletin 2014 Q3

 

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Arrow Global Limited is registered in England and Wales with company number 05606545. Its registered office is at Belvedere, 12 Booth Street, Manchester M2 4AW. Arrow Global Limited ("AGL") is authorised and regulated by the Financial Conduct Authority for certain credit-related regulated activities, and is part of the Arrow Global Group. AGL is registered on the Financial Services Register under registration number 718754.