That famous song performed by Liza Minnelli in the 1972 film Cabaret isn’t quite true.
It isn’t money that makes the world go round, it’s debt. It always has been. Since time immemorial people have been borrowing money to enable them to do those things they want to do: create a business, buy a house, improve their lives.
And also since time immemorial, money lending and debt have been demonized. Which is strange, because debt enables dreams to come true. The reason for the bad press, of course, is because when debts go wrong, they can have disastrous consequences.
And there is plenty of scope for things to go wrong! According to the latest statistics from The Money Charity people in the UK owed £1.516 trillion at the end of December 2016. The average debt per household, including mortgages (but bear in mind that not everyone has a mortgage!) was £56,153 which is an average debt per adult of £30,022 or about 114% of average earnings.
The Office for Budget Responsibility’s November 2016 forecast says that household debt is predicted to reach £2.294 trillion in Q1 2022. This will make the average household debt £84,964.
There is no question that we all rely to a very large extent on debt.
But when things go wrong, the statistics can be equally eye watering. Every day Citizens Advice Bureaux in England & Wales deal with more than 4,000 new debt problems. Every day 2,799 CCJs are issued, 248 people are declared insolvent or bankrupt and 15 properties are repossessed.
Why do finances go wrong? To state the obvious, a loan is a long-term agreement and clients don’t really know, when they commit to debt, what life-events may occur in the years to come, that may throw their well-laid plans off track. Job loss, marital breakdown, and ill heath – are just a few of the factors that can turn someone’s finances into turmoil.
Let’s be honest, many of us have probably sailed a bit too close to the wind with our finances in the past. If you can make it from first to last job without any money issues, you’ve been a very fortunate person.
Which makes it all the more surprising that, as a society, we seem to have a fairly intolerant attitude to debt, especially when it results in financial problems. If someone has an impaired credit record, it can take up to six years for it to clear and, during that period, they are often treated as financial outcasts. Which makes no sense at all.
What matters most isn’t encountering financial difficulties, but how those difficulties are dealt with. If someone is able to get their finances back on track and learn from an unfortunate life event, then I believe they should be given a second chance and not punished by being made to wait for several years before they can borrow once again.
The good news is that if a client’s debts do run out of control, they have a number of options available to them that don’t involve loan sharks and extortionate repayment terms. Lenders such as Magellan will consider applications from a wide range of borrowers, from those who may simply have an immature credit record and be unable to pass a high street lenders’ credit score, to those with significant historical debt problems who may have been declared bankrupt or be subject to an IVA or debt management plan.
For brokers, being able to help clients who have experienced debt problems in the past is as important as helping borrowers who may have a clean credit record. It makes perfect sense from both a client relationship and business perspective.
Debts going wrong shouldn’t be viewed as a disaster. Just another of life’s challenges to be dealt with!
Simon Read is managing director of lending at Magellan Homeloans