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Making money from consumer debt problems
By
Euan Stuart
Oct 31, 2005
Even after the most humiliating defeat, sportsmen are apt to claim that they will “take away a lot of positives”, as Tom Bulford puts it in The Fleet Street Letter. Although that’s not exactly realistic in all cases, positive thinking isn’t a bad thing for sportsmen nor for investors. Take the debt crisis looming in the UK. A day of reckoning might lie ahead for Britain’s borrowers, but let us not forget that “one man’s problem is another man’s opportunity”. For every person who has landed in a debt hole, there’s a company out there that’s aiming to make some money out of digging them out.
There’s certainly no shortage of those who have got themselves in too deep. After all, we’re spending like never before. Whether it’s on credit cards, property or household goods, the rate at which we’re spending money is outstripping the rate at which we’re saving. The massive competition between banks and building societies to sell mortgages, credit cards and banking services has pushed down borrowing rates and encouraged us all to spend, spend, spend. At the same time, rocketing house prices have led a generation of housebuyers to take up overly large mortgages. As yet, there is no prospect that inflation will, as it did in the 1970s, erode the debt burden quickly, points out Peter Temple in Investors Chronicle. Today, British consumers are more than £1trn in debt, and the UK savings ratio - savings as a percentage of disposable income - is currently only about 6%. No wonder then “that, in a million British homes, lie televisions and freezers that have not been paid for... a steadily mounting pile of unsettled credit-card bills… and anxious consumers wondering how they can fend off their creditors,” comments Bulford.
But who is benefiting from the business of debt? One answer is the pawnbrokers, who advance cash against your valuables and then keeps them if you don’t pay the loan back. A second is the finance providers who lend to people who don’t have a bank account - a 12th of the UK population. And a third answer is the companies who help people to reorganise their debts and keep creditors at bay in the process. Such firms arrange remortgages and consolidation loans, and help debtors to make informal arrangements with their creditors or, if the situation is utterly hopeless, they help them to declare bankruptcy. However, their main aim is to sign people up for Individual Voluntary Arrangements (IVA), which are legally binding, five-year compromise agreements. With an IVA, the debtor agrees to pay his creditors a fixed amount each month, depending on his ability to do so. If he breaches the agreement at any time, he faces bankruptcy. If he doesn’t, he escapes it and the creditor ends up with a certain amount of cash. This is big business for the middleman. Debt Free Direct earns £7,000 (from creditors) for each IVA it sets up.
Debt-financing is controversial, thanks to rogue lenders, but it isn’t going away any time soon. Borrowers are already in pain, as Heather Connon points out in The Guardian. Credit cards are “freely available”, even to those with a poor credit risk. Houses now cost buyers up to five times their average income - more than during the bubble of the late-80s - and too many people have borrowed too much to buy them. Add in the series of rate rises we’ve seen this year and, if the OECD is right, those rises we’ll see next year, and things don’t look good for the UK’s reckless spenders. But they do look good for pawnbrokers and IVA arrangers.
Published in Investment-Advice
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