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A new report, produced by Dr John Gathergood, an economist at The University of Nottingham, warns that if independent forecasts are right and unemployment continues to rise the demand for debt advice by the middle of next year will exceed that seen at the peak of the financial crisis.
Between 2008 and 2009 the number of individuals seeking debt advice soared to record levels. Over one and a half million people sought help with money problems — an increase of 350,000.
Dr Gathergood’s report, Demand, Capacity and Need for Debt Advice in the UK has been produced on behalf of the Money Advice Trust and seeks to estimate future demands for debt advice across the free-to-client and other debt advice sectors and how these services will cope in the future.
Dr Gathergood, an expert on credit, debt and borrowing in the Centre for Policy Evaluation in the School of Economics, said: “Despite demand for debt advice currently being at near all-time high levels in the U.K., the scale of potential need for debt advice among households remains much greater than the level of advice currently sought. At any time up to five million individuals report arrears on consumer credit, failure to keep up with their mortgage payment obligations, or that meeting their credit commitments is a ‘heavy burden’. Of these, only one in six seeks advice from any source, and even fewer seek advice from the free-to-client advice sector.”
In 2010 the free-to-client sector will have provided advice to 1.4 million individuals from 1.2 million households. The stabilisation of demand in 2010 is, says Dr Gathergood, due in large part to the moderation in unemployment growth and modest reductions in the cost of credit. If unemployment falls in line with Office for Budget Responsibility (OBR) forecasts demand for debt advice will moderate over 2011-2012.However, if independent forecasts are right by mid-2011 demand for advice will exceed that seen at the peak of the financial crisis in later 2009.
Dr Gathergood said: “Statistical analysis suggests that individuals with the greatest level of problem debts are more likely to seek advice, yet still the majority of consumers with problem debt do not. Socio-economic and demographic factors play a large role in determining whether an individual with problem debt chooses to seek advice: men, married couples, those with children and individuals from an ethnic minority background are all less likely to see debt advice for a given debt problem.”
Dr Gathergood’s research shows that demand for debt advice is highly sensitive to trends in unemployment and the cost of credit. His report states that the UK is currently experiencing unsustainable record low interest rates, which have reduced the cost of credit. The fear is that if the cost of credit goes up the debt burden on UK households and the prevalence of problem debt will increase markedly. The ability of the free-to-client advice sector to meet an increase of this scale is dependent, in part, on online advice which has limited capacity and might not be an adequate substitute for in-person or telephone advice.
Joanna Elson OBE, Chief Executive of the Money Advice Trust, which commissioned the research, said: “The last few years have required debt advice charities like ours to bring about a step change in our capacity, not just to help people out of their immediate debt problems, but also to help them back into financial health with longer term planning.
“Should unemployment rise next year to the extent that independent forecasters predict, together with potential interest rate rises, it seems we will face further challenges in meeting new demand for help. However, the research has also unearthed a challenge that exists already — namely that only one in six people with a debt problem seeks advice. It is vital that anyone struggling with debts is able to make informed decisions and understand all of their options; the best way to do that is to seek advice from independent experts.
“The good news is that free, independent advice is available, and that the free-to-client advice sector has successfully managed to expand its capacity to meet the huge growth in demand we have witnessed. Effective free, independent money advice is available from a range of organisations through a variety of different channels including face to face, telephone and online.”
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The Money Advice Trust (MAT) is a charity formed in 1991 to increase the quality and availability of money advice in the UK. MAT’s vision is to contribute to reducing unmanageable debt of UK consumers and its mission is to support individuals in the UK with unmanageable debts and to improve the capacity, quality and efficient delivery of free-to-client independent money advice. The Money Advice Trust works with a range of partners to help ensure free, independent money advice is readily available