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

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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

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