Tuesday 15th February, the 45th day of 2011 marks the annual ‘Debt Freedom Day’. British consumers have now earned enough to pay off the interest on their debts for 2011, five days ahead of last year.
Dubbed ‘Debt Freedom Day’, it’s the first day of the year when the interest payable on debts, becomes equal to average earnings freeing lenders from this outgoing. This allows a statistic to be presented, showing how many days the UK consumers have taken to pay off the interest on debts. The figure varies annually depending on national debt levels, earnings, interest rates and willingness of lenders to lend. In 2007 consumers had earned enough to cover interest costs by 1st February, in 2008 this jumped to 10th March, and in 2009 it moved to 25th March even later than the previous two years. During the tail end of the recession in 2010, due primarily to the unwillingness of high street banks to lend, and consequently less borrowing and debt, Debt Freedom Day was announced on 10th February. The figure for how many days it takes consumer to pay back interest costs is calculated by taking the average interest payment, on outstanding unsecured loans and credit card debts and dividing this by the average person’s daily earnings. Even though the day on the calendar arrives prematurely this year, it is not necessarily an indicator of increased financial stability. Hayley North, Managing Director at Wellers Wealth Management Ltd said:“The consumer is worried about the future near-term. Few have been given pay rises, many are at risk of losing their jobs and with interest rates at all-time lows they are choosing the cautious path of repaying debt while they can and trying not to borrow any more than they need. It is easy to underestimate how frightened people are. Prices are rising but pay packets are stable or shrinking. Unsecured debt is still readily available and this is still a popular option for households keen to minimise interest costs and large financial outlays”On the surface it appears that borrowers are getting on top of their debts, but the earnings amounted in the 45 days taken this year to reach Debt Freedom Day simply cover the interest payable, the total debt itself is yet to be paid. Paul Clarke of MoneyTools, said: As households repair their balance sheets they adjust household expenditure accordingly and part of the focus then becomes repaying debt as they feel less wealthy and secure about the future. As interest rates are at historical lows capital is being used to repay more of the debt. Debt has been like a drug over the past decade and households have to wean their way off it. Those that have adapted quickly will be repaying debt and repairing balance sheets. Those that are still addicted will still be plugging the gap between expenditure and income through credit cards and unsecured debt. Research carried out by the professional advice website, unbiased.co.uk has revealed the extent of the nation’s debt problems. They found that credit card debt has reached over £58 billion, and £120 billion in personal loans have been heaped up by consumers. With the average rate of interest charged on credit cards in 2010 climbing to 16%, the soaring national debt levels are hardly surprising. According to statistics released by The Insolvency Service, in the fourth quarter of 2010 there were 30,729 individual insolvencies in England and Wales. This sees a 13.6% reduction, from the same quarter a year ago. However in 2010 overall, there were 135,089 individual insolvencies in England and Wales, an increase of 0.7% from 2009. The Insolvency Service has reported that the 2010 insolvency figures are in fact the highest since records began in 1960. Karen Barett, Chief Executive of Unbiased.co.uk, said: “With debt levels still remaining at extreme highs there is no better time for people to service their debt and get back in control of their finances. Debt Freedom Day is not only to remind consumers of how much of their hard earned cash they shell out just to pay off the interest alone but to highlight the need to take action now and seek advice.”“Rather than worrying about it and letting their personal finances spiral out of control, people should instead pro-actively manage their finances and get advice from an independent financial advisor who will help them make sure they are making the right choices according to their financial situation. An IFA can help consumers to make their money work as hard as possible and balance their finances to repay back any debt as quickly as possible.”So how in 2011 have consumers managed to free themselves of the interest compounded on their debts five day ahead of 2009. The recent figures present a two-fold explanation, it’s possible that borrowers are becoming more aware of the need to manage their debts, but the unwillingness of banks to lend could also be halting them from taken out secured loans, thus disabling debts from mounting further.
By Florence Mosshart
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