Hopefully, 2021 will be the year COVID19 itself is brought under control in one way or another. It is, however, difficult to see its economic consequences being resolved quickly. Then, of course, there is the matter of Brexit. Put the two together and it’s easy to see how some people could be pushed to the financial brink. This raises the spectre of a debt pandemic.
The current situation
At present, the UK’s situation is probably a case study in the phrase “it could be worse”. On the one hand, there’s no disputing the economic impact of COVID19. On the other hand, a combination of support measures and swift adaptation has helped to lessen the blow.
Those support measures will, however, need to be ended at some point. Temporary adaptation will need to give way to a “new normal”. This change will inevitably create winners and losers as that is the way of change.
For example, if remote working becomes the new normal, or at least becomes more widespread, then there will be huge implications across a variety of industry sectors. In simple terms, it could hurt any business which depends on “commuter footfall”. It could also benefit any business which can reach out to customers in their own homes.
The way forward for individuals
At present, the financial services industry is working with the government to support those affected by COVID19. Even now, however, the support has its limitations. For example, under current rules, payment holidays can last for a maximum of six months. What’s more, the lenders can continue to apply interest during the payment holiday.
It’s important to note that the special arrangements for COVID19 are in addition to a lender’s standard obligations to treat their borrower’s reasonably. This means that borrowers will not necessarily just have the proverbial rug pulled out from under their feet when COVID19-specific support comes to an end.
At the same time, however, support measures cannot last indefinitely. In other words, one way or another, borrowers have to find a path out of debt. This means that either they need to find a way to repay it, or at least enough to satisfy the lender (and possibly with concessions such as reduced interest) or they need to become insolvent. Both of these options have clear repercussions for lenders.
The way forward for lenders
It seems likely that lenders are going to need to move forward cautiously. On the one hand, they will want to recoup as much as possible of their loan book. On the other hand, they will have to be very aware of potential backlash if they push too hard.
One potential way to square this circle is for lenders to show forbearance to existing borrowers but to restrict new lending. This might lead to relatively higher interest rates since lenders would need to make as much profit as they could out of a smaller number of people. That said, if interest rates were low, the real-world effect could be minimal.
The effect on businesses
Businesses which sell essential goods and services may see little impact. Even they, however, are unlikely to escape completely unscathed. As a minimum, they will presumably have limited scope for upselling. Businesses which rely on discretionary spending could be far more exposed.
There is, however, another possibility, which is that an increase in remote working could salvage some businesses, albeit while potentially sinking others. Remote working does not just eliminate the costs of commuting, it eliminates the time involved. The realities of commuting mean that this time cannot always be used productively, whereas time at home potentially can.
In other words, it may be much more practical for home workers to increase their income through “side-hustles” than for commuters to do so. This small difference may be enough to allow the UK to avoid a debt pandemic.