Could ‘risky’ credit boom be good for your family?

The savvy middle classes taking advantage of low interest rates are driving the growth in borrowing, reports Sam Meadows

Gloomy warnings from the Bank of England about the nation’s risky borrowing habits have been a regular feature of the past year, but new figures suggest these fears may have been overblown. A year ago Mark Carney, the Bank’s Governor, sounded the alarm on the rapid expansion of consumer credit, saying banks were “failing to learn the lessons” of the financial crisis.

It is true that the British appetite for driving the latest cars and extending our homes shows no sign of abating – and much of the growth in recent years has been fuelled by debt. But, contrary to concerns about “subprime” lending to the poorest in society, a very different picture is emerging: the driving force behind the increase is the middle class.

Figures from Freedom Finance, a lending intermediary, show that the middle-class borrowing boom is gathering pace. Last month just over half of its new loans were taken out by customers with an “excellent” credit rating, defined as higher than 450 with Equifax, the credit scoring group.

Six months ago this figure was just 32pc. The number of new loans issued through Freedom Finance to those with excellent ratings rose from 1,385 in November last year to 5,843 last month, a fourfold increase.

Brian Brodie from the firm suggested that wealthy savers could be turning to loans because record low interest rates had driven many to lock their savings up in fixed-term accounts.

Rock-bottom interest rates lower the return on cash but make it cheaper to borrow. The average rate on a £7,500 personal loan has plunged by a third in just five years, from 6.9pc to 4.6pc today.

Charlotte Nelson from Moneyfacts, a data provider, said: “With rates on personal loan rates still falling, it is easy to see why people are attracted to the deals on offer. The wealthier you are the more likely you are to meet the lenders’ criteria and be accepted for these deals.

“The wealthy have not been immune from the wage stagnation that has occurred recently. Borrowing by using a credit card or loan allows the borrower to maintain the standard of living they are used to.”

Mr Brodie said: “Lots of these people will have their wealth tied up and locked away, particularly while rates are so low. With the amount you’d have to pay and the effort to get that money out, many people might be better off borrowing the money. If you have a good credit history, that’s easy enough to do.”

He added that the rising number of interest-free offers and credit cards had fuelled the trend.

Figures released by the Bank of England at the beginning of this year also showed that much of the nation’s borrowing was being done by those without a mortgage. Soaring house prices have forced many to rent into their 30s, with some estimates suggesting that a third of millennials will still be renting in retirement.

Joe Gladstone, a personal finance expert at University College London, said this had ushered in a generational shift in attitudes to money.

“There is an increasing number of professional people who don’t have a mortgage and might be living different lifestyles that encourage them to spend,” he said. “There’s this idea around whether young people are prioritising experiences over stuff. That might be encouraging them to take on more debt. People always tend to extend their consumption to the boundaries of what they can spend.”

Mr Carney has warned that the lessons of the 2007-08 financial crisis are being forgotten. His caution was aimed