The Widening Divide Between Personal Earnings and Debt

Whether you’re studying broad trends or looking closely at your own finances, assessing the debt to earnings ratio is an important part of the big picture. When economists track these trends, they examine how fast salaries are rising, compared to debt increases across the country. Banks, building societies and other stakeholders furnish the data, which is then broken down into an easily digested summary of economic health.

Once the facts are in, analysts interpret the figures, injecting their own opinions and beliefs about the way things will unfold in the future. The summary snapshots created by professional prognosticators provide a general reference about economic health. Do earnings outpace inflation? Are Britons saving enough? Is the workforce making ends meet?

Answering these important questions helps legislators and regulators make decisions about interest rates and economic policy, but for everyday citizens, what’s happening at home is the ultimate test of financial health. Unfortunately for some families, current analysis reflects a wide disparity between the pace of wage growth and increases in personal lending.

Data Highlights a Growing Gap

Another round of data has emerged recently, highlighting the current state of UK workers’ earnings and their corresponding level of outstanding personal loans. According to research conducted by BBC News, the value of personal loans in Great Britain has risen four times faster than wages.

Among the figures studied by BBC, UK Finance has indicated households in the region carried outstanding personal loan balances valued at about £37 billion, during 2016-17. On the bright side, the Financial Conduct Authority (FCA) reports that most of the loans accounting for the balance were issued to individuals capable of keeping pace with their repayment obligations. At the same time, however; debt advice charities such as Christians Against Poverty (CAP) are reporting brisk business addressing debt concerns. The group reported the first month of the current year as their busiest ever month, advising people about personal debt.

According to Office of National Statistics (ONS) figures, a characteristic full-time worker in Great Britain has seen his or her earnings rise by around 6.5 per cent since 2013-14. Within the same span of time, data from ten of the biggest building societies and banks, published by UK Finance, indicates the value of outstanding personal loans has increased by 25 per cent. You don’t need advanced training as an economist to see how this unsustainable trend could undermine the individual and collective financial health of British citizens.

Where Does the Money Go?

Loans don’t become problematic until households are unable to pay their debts. Though a substantial share of the outstanding balances amassed in recent years can be repaid on time, it is thought some Britons are borrowing money to pay for everyday necessities. This particular cycle doesn’t reflect the balance families need to reconcile their earnings and outgoings, month after month.

Borrowing from a family member or occasionally taking out a payday loan provides access to quick cash, without a formal credit check. As long as you compare lenders and wipe the debt according to the terms of each loan, using this type of financing won’t add to your long-term burden. However, information brought forth by the BBC England Data Unit suggests the regions with the lowest increases in median pay are the same areas experiencing the largest growth in unsecured loan balances.

Without money coming in to repay these long-term obligations, UK borrowers will be hard-pressed to reverse the trend, potentially leading to greater financial difficulties. Analysts warn the rising tide could not only impact individual households, but could ultimately undermine national economic health.

Although most lenders appear to be following the rules put in place since the global financial meltdown, personal borrowing continues outpacing earnings growth. If you’re overextended, needing a long-term solution, join the growing number of people calling on debt charities for help.

Paul graduated in 2001 with a degree in Finance. Since then he has gone on to work for several of the UK's most well-known financial institutions.

An avid blogger and a huge football fan, Paul is here to guide you through the ins and outs of personal finance and perhaps save you some money in the process!

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