Managing debt in a slowing economy

11 June 2008

Managing debt is never easy, but it tends to get harder when the economy slows down. House prices, interest rates, inflation, unemployment – all these national factors (and many more) have a very real impact on our own day-to-day finances.

June’s report from the OECD* says that the world’s economies, and the UK’s, will take longer than expected to recover from shocks like oil prices and the credit crunch. It’s bad news for everyone, as a slower economy means people have less disposable cash.

But it’s particularly worrying for people whose finances are already stretched to the limit. If their entire income is already taken up managing their debts and paying for basic living expenses, how will they cope when their income goes down, their expenses go up – or both?

What’s ahead for the UK?
The credit crunch and the problems in the housing market are both slowing the economy down. The OECD thinks the nation’s GDP (Gross Domestic Product – the total value of goods and services produced) will grow by just 1.8% this year, and only 1.4% in 2009 (last year, the figure was 3%).

At the same time, the CPI (Consumer Price Index – the prices we pay for goods and services) is expected to grow by more than 3.5% later this year. That’s much higher than the government’s 2% target, so prices are rising more quickly than they should.

That high inflation means the Bank of England isn’t likely to cut its base rate, as lower interest rates mean money becomes cheaper, which adds to inflation. So lenders aren’t likely to cut their interest rates (which would make debts more manageable).

Finally, the OECD thinks unemployment will rise, from 5.4% last year to 5.5% this year and 5.8% in 2009.

What can a borrower do?
So economic growth is slowing down; prices are going up; the cost of debt (probably) won’t come down; and more people are going to be unemployed.

When household budgets get squeezed, every penny becomes more important. Any borrower struggling to keep up might find it a lot easier if they could just make their debt repayments more manageable – with a professional debt solution, perhaps.

They could, for example, take out a debt consolidation loan or mortgage. By arranging to pay it back slowly, they could reduce the amount of each monthly payment (although this would mean the debt takes longer to clear).

They might, if their debts are substantial, consider an IVA (Individual Voluntary Arrangement), a formal agreement with their unsecured creditors. They’d agree to pay a fixed monthly amount that’ll leave them with enough for their mortgage / rent and other essential living expenses. After (normally) 5 years, their outstanding unsecured debt would be written off.

Or they might join a debt management plan – asking a debt management specialist to ask their unsecured creditors to accept lower payments, freeze interest and / or waive charges. Every debt management company is different, but some will handle everything from answering phone calls and letters to renegotiating payment terms and distributing funds.

*The Organisation for Economic Co-operation and Development publishes its Economic Outlook twice a year.

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