Soaring debts trap younger generation

In a report, Unsecured and Insecured?, published today Citizens Advice said people aged 17-24 years old came to them with 102,296 debt issues in the past year – 21% more than the previous year.

The charity says this increase comes against a backdrop of exploding unsecured borrowing among young people which risks trapping a new generation in problem debt.

The consumer champion has analysed official data which shows young people have an average unsecured debt of £12,215 – more than three times what it was (£3,988) before the financial crash between 2006-08.

The average total debts of young people grew by more than 200% between 2006 and 2012, the last year data from the Wealth and Assets Survey is available.

Citizens Advice says as well as an increase in the volume of debt, there have been changes in the types of loans young people are taking out.

Some 45% of this debt rise is attributed to student loans, but the majority of this increase has primarily been driven by ‘formal loans’ – like bank and payday loans – and borrowing from friends and family.

The charity’s analysis shows a fivefold increase on the average formal loan, from £969 to £4,577 over the same period. Loans from friends and family also rose during this time, from an average of £30 to more than £1000.

Young people have an average debt to income ratio of nearly 70%, compared to 34% for 25-29 year olds and 11% for 60-64 year olds, the report adds.

The charity also helps a higher proportion of young people than older groups with Debt Relief Orders, which allow indebted borrowers on low incomes to file for bankruptcy.

Gillian Guy, chief executive of Citizens Advice, said: “A new generation of young people are starting out with stifling levels of debt.

“Our research shows that student loans account for less than half of the debt rise amongst young people so it is crucial we understand why so many are turning to other forms of unsecured borrowing.

“Many young people already face challenges getting on the career and housing ladders – doing this while saddled with huge unsecured debts make it an uphill struggle.

“As well as looking for a longer term solutions, it’s important people can get independent advice, guidance and support about how they can manage their finances.”

The report adds that UK households already owe £170 billion in unsecured debt and forecasts suggest this could hit £350 billion by 2020. Unsecured debt is growing faster than secured debt and faster than incomes, pushing debt to income ratios back toward pre-crisis levels by 2020.