£6bn debt tsunami ‘inevitable’
Debt charity StepChange has warned that the UK faces a debt tsunami of £6bn, affecting 4.6 million households, due to the coronavirus pandemic.
The charity warns that coronavirus-related debt will act as a drag on economic recovery and will deluge advice services once the reality of people’s situations begins to hit home.
On the basis of research by YouGov, StepChange estimates that each affected adult has accumulated an additional £1,076 of arrears and £997 of debt during Covid-19. These figures reflect the situation as of late May and are likely to increase substantially before the lockdown is fully phased out.
Meanwhile, 4.2 million people have borrowed to make ends meet, most often using a credit card (1.7 million), an overdraft (1.6 million), or a high cost credit product (980,000).
While 70% of those affected were not in financial difficulty before lockdown, households who were already struggling before the pandemic have seen their finances hit disproportionately hard.
Of those in severe problem debt before the outbreak, 45% have been negatively affected financially by coronavirus. This compares to 25% of those not in financial difficulty.
Without mitigation, StepChange warns that the situation for both groups will get even worse once job support and temporary forbearance measures are withdrawn.
The charity is calling on the Government to mitigate some of the worst effects, and to smooth the bumpy road that lies ahead for many households’ finances.
Phil Andrew, StepChange CEO, says: “We were already dealing with a debt crisis, but Covid has so far added another four million people and counting to the number who are going to need help finding their way back to financial health. With £6bn of additional household debt directly attributable to the effects of the pandemic, this is a problem that isn’t going to solve itself.
“Cost might be seen as a barrier to the recommendations we outline. However, the costs of not intervening would ultimately be higher. The misery, damage and economic drag that will inevitably follow the pandemic can and should be mitigated through public policy, and the approaches we suggest are the biggest game-changers.”
StepChange has identified three realistic main focus areas that would help the maximum number of households transition back to a sustainable financial position, and in turn reduce prolonged, long term pain to the wider economy.
Ongoing protection for arrears
StepChange says tapered ongoing protections and forbearance on housing, rent, credit repayments, and council tax arrears would provide a sustainable route back to normality.
It says that while the nature of tapered support across different types of debt may vary, there should be a central principle of a gradual exit, rather than a sudden cliff-edge at which full repayment is required.
A £5bn central fund
Another recommendation is the implementation of a central fund of at least £5bn to enable grants for those who fell behind or were forced to borrow during the pandemic and whose incomes do not recover.
It says this would enable partial or full debt relief for the worst affected where realistic chances of repayment may simply not exist.
Universal Credit reform
StepChange recommends that Universal Credit should be reformed to address the shortfall between the support available and households’ realistic essential costs.
It says the reform should at least be temporary – but permanent reform would be better – and include dropping the five-week wait and not seeking repayment of advances.