As the nation continues to grapple with COVID-19 and the impact that the pandemic is having on employment and the economy becomes clearer, Scots are slowly adjusting to a new way of living.
In addition to the increased number of job losses, another unanticipated consequence of the global crisis is thousands of Scots each month may find their ability to borrow reduced going forward.
Banks and financial institutions have now informed the Bank of England that the availability of finance, such as credit cards, personal loans, car finance and mortgages is likely to be reduced over the next couple of months.
Is this a second credit crunch?
This is similar to what occurred after the last financial crisis in 2007 and resulted not only in a slowing down of the housing market, but also a reduction in the availability of products such as interest-free periods when people transferred credit cards, and the availability of overdrafts with banks.
For many who had been juggling their credit cards, this was the final straw and forced many to seek formal debt solutions such as Protected Trust Deeds and Debt Payment Programmes under the Debt Arrangement Scheme.
It is also likely many will be forced to stay in existing mortgages, stuck on standard variable rates and not be able to take advantage of lower interest rates that are often offered for an introductory period when someone re-mortgages.
Another area of personal finance that may also be impacted will be car finance, which over the last five years has grown rapidly, resulting in nearly 90% of all new cars being bought on finance.
Why is lending being restricted?
Basically, lenders are concerned things are going to get tougher and that the risk to themselves will increase if they continue to lend the way they have been lending over recent years.
They are worried that many people will be unable to resume payments to their credit cards and mortgages once payment breaks come to an end.
A consequence of this will, therefore, be a contraction in the availability of funds that can be borrowed, which in itself can precipitate a debt crisis for some, where they have become overly dependent on both short-term and long-term credit in how they manage their finances.
Many consumers have already anticipated this, with the amount that people have been spending significantly reducing over recent months; not simply because they have had less to spend, but also because, where they can, people have been trying to increase their savings.
Is it time to reconsider your financial situation?
If in recent years you have found yourself relying too heavily on credit cards, overdrafts, and other forms of short-term credit to get by, it is possible you need to start thinking about some financial spring cleaning.
Even after the last credit crunch, lenders began reducing people’s borrowing limits on credit cards, even if they had not missed any payments. Some consumers had their access to credit cards removed, despite having zero balances each month.
Likewise, people who had good and excellent credit ratings struggled to get re-mortgages and found themselves stuck with higher interest rates that they could not afford.
It is also no surprise that when this occurred, it was also accompanied by an explosion in the rise of payday lending.
This time, though, due to increased regulation by the Financial Conduct Authority (FCA), this type of borrowing will not be as readily available; and due to tougher affordability rules, the availability of high cost borrowing will be significantly reduced.
Do you have a budget?
The first thing you need to ask yourself is if you did not have access to short-term credit, would you be able to get by each month? If the answer is no, then you need to start thinking about reducing your monthly expenditure.
This will mean cutting back on things you cannot afford, to reduce your reliance on short-term credit each month.
In terms of any longer-term borrowing, such as for car finance agreements and mortgages, your ability to change this may be slight and instead you may have to learn to budget to make these payments affordable. This may even include larger credit card bills, where you have become accustomed to managing them through switching balances to take advantage of interest-free periods. You may now have to rethink these as more longer-term loans that have to be repaid rather than managed.
What if managing your debt puts you in the red?
Where you have created a budget and got control of your short-term credit, but you still find you are plunging into the red each month because of long-term debt repayments, you may have to think about another more formal solution.
This is equally true if you are not able to reduce your shorter-term borrowing each month.
In such a case, it may be necessary to explore all your other options, including Protected Trust Deeds and the Debt Arrangement Scheme as a way of managing these debts, so you can have a household budget that does not leave you in a deficit.
