Past Articles for July, 2006

Vincent Cable, the party’s economics spokesman, said that the four-fold increase in the amount of young bankrupts since 2001 showed a “pressing need” for financial education.

“There is now a pressing need for better financial education for the young. This generation of young people face an unprecedented burden of debt which is going to affect their ability to buy homes, start families and save for old age,” said Mr Cable.

“The government has shown alarming complacency on this issue,” he added, calling for action to increase financial awareness and a clamp down on “irresponsible behaviour”.

His comments come as the amount of bankruptcies amongst 18 to 29-year-olds have risen from 1,681 in 2001-02 to 6,520 in 2004-05.

Fellow Lib Dem MP Jenny Willott agreed that there were “serious financial problems” affecting young people, particularly due to student debt.

She urged ministers not to “shut their eyes” to the problems but to do something to tackle debt and bankruptcy among the young.

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According to John Borgars of Equity Development, IVAs are both quicker than formal bankruptcy procedures and avoid incurring large lawyers’ fees.

Mr Borgars said that the introduction of IVAs combined earlier forms of informal and cheap agreements with the advantage of being backed by the law.

“The advantage of an IVA is that the debtor is not formally bankrupted,” said Mr Borgars. “There is no attachment of earnings so the employer does not have to be informed; interest on the debts are frozen [and an] IVA allows the debtor to retain enough of their income to live decently but without any luxuries.”

His comments come as his report shows that the number of individuals taking out bankruptcies or IVAs has rocketed since 1997 as debt grows.

Although Mr Borgars said that IVAs were still not “an easy option”, he said that for those prepared to live without luxuries for up to five years they could clear debt without the negative effects of bankruptcy.

Click here for further information on the Equity Development report.

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The charity said that it plans to distribute financial know-how tool kits to thousands of school pupils as part of a new scheme.

John Bateman, chief executive of UK Youth, told Channel 4’s News at Noon: “20 per cent of young people, 20-24, are carrying around £5,000 of personal debt.

“Debt can lead to all sorts of problems: hopelessness, despair and in some cases even suicide; so we are very, very keen to address that situation.”

Action came following UK Youth saying that it received details about the “serious” nature that money plays in the lives of young people.

Mr Bateman added that debt can have a large impact on communities, but this new scheme should help young people better manage their finances.

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Over a third of students are doing “non-graduate work” according to the Higher Education Statistics Agency (HESA), such that they are saddled in low paid jobs with a mountain of debt from their studies.

“With increasing levels of student debt and the rising cost of top-up fees, more students entering higher education will want to see a financial benefit at the end of it,” said NUS vice-president, Wes Streeting.

Students are currently graduating with an average of £18,000 of debt but this is set to rise even further once top-up fees are introduced this September.

Yet these new figures show that many are likely to struggle to find a way to repay this amount once they find a job.

“These figures will worry students and make them think again about whether they want to take on that debt,” added Mr Streeting.

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Symptoms of ignoring the problem – and not making the debt go away – include not opening bills, or hiding the extent of the financial crisis from family.

Stephen Rose, director of the Debt Advice Bureau, said: “There is nothing wrong with borrowing but racking up mountains and mountains of debt to subsidise a lifestyle you can’t afford: that’s what the problem is.

“There is a small group of people who are completely in denial about their debt situation, people who typically put the red letters in a drawer and don’t open them.”

His warnings come as total UK debt surpasses £1.1 trillion but borrowing continues.

Mr Rose called on people to stop living in denial about the extent of the problem and do something to clear debt.

With young people the most likely to deny they have a problem, he urged consumers to face up to debt and take advice so that it can be tackled rather than build up.

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Britannia Building Society said that it is to contact its interest-only customers to highlight the danger of only paying the interest and not the capital on their mortgage, warning that they are creating a “potential timebomb”, the Times reports.

Nick Gardner, director of mortgage broker Chase de Vere, welcomed this action, telling the paper: “This is a very welcome move and other lenders should follow suit. Under FSA [Financial Services Authority] rules, mortgage brokers are already obliged to contact interest-only clients to warn them of the dangers of interest only loans, so it makes sense for lenders to do the same.”

Interest-only deals have become popular with those on a tight budget due to the scale of payments they can make compared to regular mortgages as they do not have to repay the capital.

However, Britannia said that only half of its interest-only customers claim to be making provisions to repay the loan, which could cause them to go into severe debt in a financial crisis.

Such is the concern over the repayment of interest-only mortgages that the FSA is now said to be investigating these mortgage types before a financial crisis hits.

If you want to find out more about interest-only mortgages, click here for ClearDebt’s useful guide.

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Prudential says that over a million retirees have an average debt of £15,500 and 70,000 have a debt as high as £75,000.

Most worryingly, a quarter of pensioners say that they lack the funds to repay debt and other financial commitments.

“Debt affects people of all ages but it’s harder for retired people to get out of the debt cycle as many don’t have any way of boosting their income through working overtime or being promoted at work,” warned Angus MacIver, Prudential UK director .

His comments follow warnings from the minister for pensions reform, James Purnell, who said earlier this month that many people face a retirement of debt unless they take action now.

Mr MacIver said that there are ways to help prevent this, with proper consultation or by taking financial advice.

But without these actions, a large amount of Britain’s current and future pensioners look set for a retirement of debt rather than enjoying a time of leisure.

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According to the Association of Investment Trust Companies (AITC), parents are underestimating graduation debt levels by nearly half the true amount of £13,500.

“This year parents and future students have underestimated by a greater margin the amount of student debt they will face on graduation despite the publicity surrounding the introduction of top-up fees from September,” said Annabel Brodie-Smith, communications director at the AITC.

“Many young people go to university to enjoy some of the best years of their life but on graduation they find themselves struggling to repay their debt.”

Her warnings come as new students this year prepare to graduate with even more debt than their predecessors thanks to top-up fees which are repaid after graduation.

Ms Brodie-Smith said that it was vital for parents to plan for the future and that they now need to start saving at an earlier age than before to pay for their children’s education.

Recommending investment trusts and other funds, Ms Brodie-Smith said that by investing for the future, parents can help students graduate without a massive debt burden.

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Cheltenham & Gloucester warns that a rise in the rate by a quarter of a point will mean that average families could spend nearly half of their take-home pay on mortgage repayments.

Managing director of C&G, Jon Pain, said: “Despite the improvement in the index in the first quarter, affordability is likely to get significantly worse later in the year if, as widely predicted, interest rates rise in the fourth quarter.”

Figures for the warning were based on someone with average earnings buying an average priced property with a 20 per cent deposit.

Although the present interest rate is 4.5 per cent, a rise is expected by many experts, especially as other major central banks have raised their rates this year.

If so, this could have a serious effect on debt as repayment on loans and mortgages tied to the rate will increase, while property values could fall and affect people looking to release equity from their home.

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According to Visa UK, £83 billion “disappears” annually from British wallets and purses, working out at £1,700 per person, enough to cover utility bills for a year.

“This research reveals how difficult it is to keep track of your spending when using cash,” warned Greg Twitcher, Visa UK vice president.

Research follows claims that average personal debt levels have reached £42,000 per person.

With £1 in every £8 being unaccounted for, much of this debt could be due to poor control of finances.

While socialising and groceries account for the largest “disappearance”, with such a great proportion “lost” many Britons could help manage their debts by simply keeping better track of their cash.

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