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UK Insolvency: With Interest Rates Set to Rise, Borrowing is Not a Long-Term Solution for Individuals or Companies

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Despite a warning from the Insolvency Service showing insolvencies are on the rise for the first time since 2010 - a 5.1 per cent increase from the previous year - the Bank of England Governor has announced that he is preparing to increase interest rates.  

The figures from the Insolvency Service report that during the second quarter of this year, 27,029 people have declared themselves bankrupt or have entered into an Individual Voluntary Agreement (IVA). The sudden rise is thought to be the outcome of the low interest rates set for the last five years, which may have led many people into a false sense of security by allowing many households to enjoy higher disposable income.

In July this year, consumers spent 2.4 per cent more on credit cards compared to the same month in 2013, Visa Europe research has found, which also marked the tenth month in a row where household spending increased.  Furthermore, there was an 8.1 per cent spending rise in bars and restaurants this July compared to last, resulting in 22 per cent fewer bars and restaurants struggling with their finances this quarter, according to the Red Flag Alert Report from Begbies Traynor.  

What is more alarming, however, is that people have not stopped after treating themselves to a meal and a few drinks: purchases on credit are fast becoming extravagant. For example, the Society of Motor Manufacturers reported a 10 per cent increase in new car sales in the last year, with 80 per cent of all new cars being bought on finance.

Overall this evidence suggests people have quickly returned to old pre-recession habits of borrowing large amounts of money to fund their lifestyles, rather than saving for the future.  Indeed, if interest rates remained the same, this would be positive for the growing economy; but amidst such warnings from the Bank of England, the news is concerning.

Many people may suddenly find themselves in a position of financial difficulty, having taken on too much credit than they can handle once interest rates rise.  Disposable income will inevitably decrease, making it harder to pay back borrowed money.

Unfortunately, some households may not have planned for such a rise in household expenditure, and these are the households most at risk of financial harm. Even as little as a 0.5 per cent increase on a £100,000 mortgage results in £720 per year extra to pay back. For those already struggling, a £720 a year (or £60 per month) increase will have a significant effect. Also, for those already on IVA’s, such an increase could potentially force them into insolvency if the increase meant they could not meet the terms of their agreement.

The best advice for those who haven’t planned ahead, is to start now, before the interest rates begin to rise. What’s more, for those thinking about entering a credit agreement with a lender, remember that funding a lifestyle based on credit is unsustainable in the long-term; only borrow if it is an absolute must; and only borrow if the monthly repayments are easily within your means.

No Win No Fee Bankruptcy and Company Insolvency Litigation Claims

Whether you are a creditor or a company owner, wanting to discuss a statutory demand for payment of a debt, a winding up (liquidation) petition for dissolving a business or a petition for bankruptcy against an individual, Advantage Litigation Services’ insolvency team can guide you through the procedures and help you find an affordable and cost-effective solution. We can also help you if you have been presented with a statutory demand or petition and wish to resist it. To get the assistance you need please call us on 0800 160 1298. Alternatively please complete our online enquiry form.

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