United in debt - United Kingdom and United States

A snapshot of debt in the US and the UK at the start of 2008.
(approximate figures)

	US	UK
Population	301 million	61 million
Adult population	226 million	49 million
Total debt (£)	7 trillion	1.409 trillion
per adult (£)	31,000	29,000
Secured debt (£)	5.75 trillion	1.185 trillion
per adult (£)	25,500	24,500
Unsecured debt (£)	1.25 trillion	224 billion
per adult (£)	5,500	4,500

Secured debt
A secured debt is a debt secured by a ‘lien’ – a legal right to a portion of someone’s property. If it isn’t repaid, the lender has the right to push the homeowner to sell up and pay them back. In general, lenders are more likely to offer larger amounts at lower interest rates when a loan is secured like this.

In recent years, rising house prices have allowed homeowners on both sides of the Atlantic to ‘use their home as a cash machine’, as many analysts have put it. Constant growth in house values has given them access to large sums of money: if the house which someone bought for $200,000 is now worth $300,000, they can borrow $100,000 against this extra value (as long as they can afford the repayments) by remortgaging or taking out a secured loan / home equity loan.

While house prices continued rising, many homeowners kept borrowing against their property like this, and many would-be homeowners took on mortgages which stretched their finances to or beyond breaking point. If necessary, both groups knew they could sell their home and (hopefully) make enough profit to pay off their debts.

But when house prices stopped ‘rocketing’, homeowners could no longer count on their property to make them money – but they did have to keep on repaying the money they’d already borrowed against their home (or borrowed to buy the home in the first place). Some homeowners are even faced with ‘negative equity’: having borrowed heavily against a property whose value has dropped, they owe more than it’s worth.

Unsecured debt
When someone can’t (or doesn’t want to) secure a loan against property, lenders are less likely to agree to a large loan and / or a low interest rate.

For years now, lenders have been relaxing their criteria and lending to people they once wouldn’t have considered for credit. As a result, the UK and the US both entered 2008 with unprecedented levels of unsecured debt.

That debt didn’t build up overnight – in the US, for example, unsecured debt almost doubled between 1988 and 1998, and then again from 1998 to 2008.

What’s next?
These days, the ‘credit crunch’ means that it’s harder to borrow money, whether it’s £5,000 for a car or £200,000 for a house.

When lenders began worrying that too many people couldn’t repay their loans and mortgages, they started being much more cautious about lending money (whether secured or not) to anyone who didn’t have a spotless credit history. The majority started turning down more applications for credit and charging higher interest rates when they did say ‘yes’.

Only time will tell when they’ll ease up on their restrictions – despite cuts to interest rates in both countries, most analysts are predicting that 2008 will be a year of tight credit conditions.