Insolvencies fall but rise in unsecured borrowing by consumers storing up problems for when interest rates rise

Responding to figures published today revealing a fall in insolvencies, the Restructuring & Insolvency team notes that a recent rise in unsecured borrowing by consumers could be storing up problems for when interest rates rise.

Consumer credit card debt and borrowing through unsecured loans has risen by £6.6bn to its current level of £162.6bn from a low of £156bn in November 2012.

Partner Steve Ramsbottom comments: “The days of the UK consumer de-risking their finances are definitely over.

“The current downward trend in insolvencies will come to an abrupt end when interest rates start to rise again.”

Recently published minutes reveal that two members of the Bank of England Monetary Policy Committee voted to raise rates in October’s meeting, leading the financial markets to price in a rate rise for mid-2015.

Steve continues: “Low interest rates combined with the improved economic outlook has led to increased consumer spending on credit cards and unsecured loans. Mortgage debt has been rising for some time but the increase in unsecured debt is new.

“When interest rates rise, a lot of people could be left shouldering debts they can no longer afford and we could see a fresh wave of personal insolvencies.”

The fall in corporate insolvencies could be reversed when interest rates rise.

Steve discusses: “Cheap credit means that business directors have been able to avoid dealing with fundamental problems affecting their businesses. But when the phoney war ends and interest rates eventually rise, those problems will be exposed and failure rates will start to rise again. The interesting thing will be whether this translates into an upturn in formal insolvencies in as much will depend upon the reaction of lenders and HMRC towards default, which is hard to predict at this point.”


Steve Ramsbottom

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