Reasons for debt; solutions to debt
22/04/2008
What’s the solution to debt? Whether you’re addressing an individual’s debt or looking for a solution to the UK’s personal debt problems, you need to start by understanding the reasons behind that debt.
In 2007, the Personal Finance Research Centre (PFRC) at the University of Bristol, supported by Standard Life, produced a report on why people borrow, and how to reduce or avoid that borrowing, at different points in their lives. It notes a significant shift in recent attitudes towards debt – and towards debt solutions.
Why do people borrow?
‘The essential function of borrowing is to smooth the ebbs and flows of income and expenditure throughout life. Previous research has distinguished borrowing to alleviate financial hardship and borrowing to augment a consumer lifestyle.’
The report contains some very interesting findings. For example:
- Young adults (18 to mid-20s) seem particularly likely to borrow to meet everyday expenses, and to make little distinction between ‘need’ and ‘want’.
- To some young adults, the availability and benefits of debt solutions outweigh the drawbacks of over-borrowing.
- Property is seen as the best investment, and worth borrowing for, as mortgages have been reasonably cheap recently and are also seen as a form of investment.
- Ready availability and cheapness of borrowing makes it attractive – many credit users feel little desire or need to seek alternatives.
What do people see as the solution to debt?
There’s a big difference between manageable debt and unmanageable debt – the kind that calls for urgent action, whether that means making big lifestyle changes, seeking debt advice or looking into professional debt solutions.
So how do people know they’re sliding from one group into the other? How do they know they might need a debt solution? Interestingly, the report states that young adults tend to see external warning signs (e.g. final demands, threats of court action) as indications that they’re facing problem debt, while older people pay attention to internal warning signs (e.g. worrying about money, losing track of spending).
Some young adults, says the report, don’t really understand what debt solutions involve – and a ‘core minority’ see debt consolidation and insolvency as easy solutions to problem debt. It also shows that people (particularly those in or approaching the ‘family years’ (mid-20s to mid-50s)) tend to see housing equity as the solution to all their future financial needs.
What’s the long-term solution to the UK’s debt problems?
The report states that governments (and businesses, in some cases) can, for example:
- Reinforce financial education. Standard Life is already involved in various initiatives – e.g. helping primary-school children understand how money works, and how it can work for them.
- Use tax policy to encourage people to save for the future.
- Counter some of the myths about money management – e.g. that housing equity is the solution to future pension needs.
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