Should there be a cap on personal debt?

Debt is an essential part of western world economy and has been for centuries. In the UK alone, 65% of our gross domestic product is consumer related and this consumer spending keeps our economy afloat. Debt plays an essential part in funding this rampant consumerism.

Over the years, personal debt has become easier to accrue and the amount of debt that it’s possible to get into has grown. However, the further we push this side of the fiscal equation, the bigger the payback.

We are currently reeling from an extremely well publicised, debt fuelled financial crisis that affected us all on a global scale. However, the more emotive debt warnings come on a local, more personal level. The effect of debt related stress on our families and on our mental health is something which it is very important to consider when counting the cost of this financial phenomenon. It can be all too easy to regard debt as a problem that affects other people simply because we’ve, thus far, managed to keep our credit cards on a tight leash. If the world financial crisis teaches us nothing else, it has highlighted how dependent we are on one-another’s money.

Occasionally, we may be reminded of an era where personal debt was essentially unheard of. Mortgages were acceptable but the idea of unsecured debt, of spending money you simply didn’t have, just wouldn’t do. There was a time when the credit and store cards that feed our families, didn’t exist. Obviously, no-one really wants a regression to those dark days but can we continue down this road towards a life of consumerist fantasy, well beyond our means? Can we be trusted with our credit card?

So, should there be an imposed limit on our level of personal debt?

There is certainly a solid argument in support of a cap being placed on personal debt. Some measure in place to keep our debts in line with our salaries, existing savings and the extent of our other debts. As mentioned, the term personal debt can itself be misleading. A lot of the debt that we consider to be personal has a much wider impact, as emphasised by the present housing market. Although we’re currently experiencing a fall in house prices, it’s still extremely difficult for first-time buyers to take their first step onto the property ladder. This artificially inflated value could be the result of the debt encouraged by mortgage lenders, driving up prices. If personal loans had been capped, prices would not be at their current levels.

It is generally accepted, for personal debt accumulation to begin during our years at university. There is something inherently contradictory in this relationship, between the aspirational drive towards future prosperity through education and the acceptance of personal debt as its side-effect.

Also, any effort to cap debt would mean less consumption. In our world of boundless consumerism and instant gratification, this just might not stand. It’s hard to argue against plain and simple saving-up, but we want it now and can often, within reason, have it now.

Once again, the housing market makes an excellent illustration of the principles of capping. Admittedly, the mortgage market can be accused of padding out salary figures to deliver us more than we can afford but the principle is that we are leant what we have an ability to pay back. However, will there be anyone brave enough to stand up and tell us to consume less, spend only what we can afford and live within our means?

Well, probably not. It’s worth considering though, that personal debt is seldom accrued due to a passion for champagne, fast cars and the finer things. In the real world, the boiler packs up and car needs breaks down and if you’re broke, you either have a cold shower and walk to work or you take on some debt and get them fixed. There’s no questioning how useful it can be to have an overdraft, credit cards and a mortgage. The fact remains that treated responsibly, debt can be an extremely valuable tool.

Lenders are as anxious to avoid bad debt as anyone. To this end, their underwriting requirements are designed to allow conventional credit streams to restrict personal debt to a level that the individual can service. Ultimately, they’re always monitoring too, so if they want to reduce a credit card limit or close a card account, they will.

So, in an age of responsible lending, shouldn’t we also embrace an attitude of responsible borrowing? After all, any limits placed on our borrowing would have to be means tested, as what’s regarded as a lot of money by some people, may not be by others. Thus, our circumstances would impose a natural limit on our level of personal debt. The government would be better employed ensuring that lenders are acting ethically and help personal debt to remain what it is, personal.