As banks predict rise in defaults, unsecured borrowing is surging

The central bank’s quarterly Credit Conditions Survey, published yesterday, shows that demand for credit card lending was also expected to increase over the next quarter.  

Lenders reported that demand for mortgage lending increased in Q4, which is then expected to decrease in the first few months of 2021.  

Default rates on secured loans to households remained unchanged in Q4, but lenders expect this to increase in Q1. 

Lenders told the Bank of England they expect default rises across mortgages, unsecured loans and lending to businesses “of all sizes” in the first three months of 2021.

In the previous Credit Conditions survey, Credit Strategy analysis showed that banks’ reported losses on secured loans were already increasing.

Just as the Bank of England’s latest report emerged, the Office of National Statistics (ONS) also revealed that nearly nine million people borrowed more money than usual through December 2020. 

The data also revealed that the proportion of people borrowing £1,000 or more has been increasing since June 2020. 

At the end of June 2020, just over 10% of adults said they were borrowing money in some form, an amount that surged to 17.4% in December. Of those, the proportion borrowing more than £1,000 increased by over 10% to 45%, during the same period.  

The ONS also revealed that as the pandemic progressed, the proportion of people reporting they would not be able to save for the year ahead increased. At the end of March 2020, 31% of people said they would be unable to save, a proportion that increased to 38% in mid-December 2020. 

A spokesperson from StepChange Debt Charity said: “There is a striking similarity between our own reporting and these figures from the ONS, showing nine million people have had to borrow during pandemic, with finances of the least well off most affected. We can all agree that there is a Covid debt problem, but what matters now is how to build the long term solutions to get people safely out of it. 

“Our own research in November last year showed how vital it is that the government recognises the deeply entrenched problem of debt caused by Coronavirus. It’s essential that public policy is adjusted to allow for clear ways out of it, including making available recovery funding to those most affected by coronavirus and struggling with financial difficulty, in order to allow households to address arrears and debt safely.

"In the meantime, bolstering the social safety net – in particular by retaining the £20 universal credit uplift and expanding local emergency support – will be essential to helping people manage debts in this time of hardship.”