Demos Daily: The Borrowers

The Government’s financial response to the current crisis is unprecedented.  Yet while many livelihoods have been protected in the short term, the long term economic impact of the crisis has yet to be seen. As is always the case, financial crises hit those hardest who can take it least, and those already in debt or those having to rely on credit. How society adapts, or doesn’t, will be crucial.

In our 2014 report The Borrowers, Demos argued that the political conversation around debt had stalled, primarily because it was being considered as a purely financial problem, with necessary solutions around regulating credit products and increasing financial education and capacity.  Our research found the opposite – starting with the people with negative experiences of debt, it emerges as a complex socio-emotional challenge, unlikely to be solved by the wider provision of ‘affordable’ credit.  Much has changed since 2014, yet as we emerge from this crisis, ensuring people with new or ongoing debt issues have the support they need will be key to our recovery, both in terms of the economy and our society as a whole.

In the extract below, Jo Salter explores the results of a series of focus groups, where participants, all of whom had debts described as ‘unmanagable’, were asked to rank each debt they had on a series of impact measures.  These included legal consequences, mental health, social consequences and more ( a full list is available in the report).  Yet some individual findings – for example why people scored the legal consequences of borrowing from friends and family highly – didn’t make sense until people’s answers were considered holistically.

All of the factors that make debt more or less harmful described in this section (eg how long their debts have been accumulating, how many they are dealing with in total, and who they can turn to for support) seem to call for a ‘whole situation’ approach rather than one related to individual debts. This suggests there is a need to look at holistic ‘debt situations’, rather than focusing on specific types of debt.

This is certainly how people we consulted tended to view things. Conflating different debts and different indicators was extremely prevalent among focus group participants, with four groups emerging typified by the way they perceived their situation:

• ‘the big picture’
• ‘the way I am’
• ‘good and bad debts’
• ‘the way debt is’.

‘The big picture’

Those in this group gave all debts and all indicators the same score.  People with this approach assessed their overall situation, rather than specific debts, or specific features of debts (their whole situation was being scored as a highly stressful 9 out of 10). They considered all debts to be equally difficult to deal with.

‘The way I am’

Those in this group believed that all debts have an equal impact on certain indicators (eg the impact on mental wellbeing is always 10 out of 10) while other indicators are ranked differently for different debts. People using this approach were assessing certain aspects of their situation in the round, while recognising that not all debts were the same. The indicators that people tended to rank equally (irrespective of the type of debt it applied to) were:

• support networks
• affordability
• urgency
• mental wellbeing
• social consequences
• ability to cope

These features are largely to do with personal characteristics, and personal responses to a situation, and say more about someone’s emotional state than their financial situation. Somebody who feels that they are unable to cope with having debt will feel this way regardless of whether the debt relates to a credit card or a payday loan. Other features which tended to be awarded equal scores by this group – like affordability and urgency – relate to the sum of all debts together. Thus someone with multiple debts reaching crisis point will not be able to afford any of them, and will see them all as equally urgent. These are also the factors where debt support services can have the biggest impact; by targeting interventions in these areas, they can help with multiple debts at the same time.

‘Good and bad debts’

Those in this group ranked all indicators equally on certain debts (eg overdraft debt is ranked 10 out of 10 on every indicator). People who used this approach singled out the debts that were affecting them the most and then used the ‘big picture’ approach described above to make a general assessment of that debt without discerning any distinction between different characteristics (mortgage arrears were being scored as 10 out of 10). This suggests that while the people in this group might experience multiple debts, one or more of the debts was much more significant to them than others, causing them distress and often motivating them to seek debt advice. These might, or might not, be those identified as priority debts by the debt advisers.

‘The way debt is’

Those in this group ranked all debts differently on all indicators. People using this approach systematically differentiated between different debts, and the varying consequences of those debts. This is perhaps the most rational approach to debt – as we discuss further below – and one the research team expected to see for most, if not all, responses to this exercise. The fact this was not the most common response confirms the overarching message from this research – that people’s experience of a holistic ‘debt situation’ is influenced by their ability to cope and other personal factors, which affects their outlook regarding all debt. This certainly has implications for how debt advice might help people effectively, as we explore later.

How common is each approach?

Accounting for the fact that some people were using a combination of ‘the way I am’ and ‘good and bad debts’ (‘some debts are worse than others, but some things affect me the same way whatever the debt’), we concluded that:

• two people in the groups used ‘the big picture’ approach
• eight used ‘the way I am’ approach
• eight used the ‘good and bad debts’ approach
• five used ‘the way debt is’ approach

The remaining grids which did not obviously fall into these four categories were not fully completed, but nonetheless it was most common for people to use ‘the way I am’ approach as a rule of thumb when assessing the impacts of their debt.

What do the different approaches to debt tell us?

Distinguishing between approaches in this way helps us to further understand people’s reasons for ranking debts in certain ways. A lot of the explanation for the various approaches described here comes down to the difference between rational and emotional thinking. The only one of the four approaches where people are thinking rationally about their debts and how each one affects them on each indicator is ‘the way debt is’.

People in the three other categories were thinking about their debts emotionally – which explains why some people were giving very high scores on measures where they knew there could not possibly be any consequences (legal consequences of borrowing from family, for example). Either one specific debt that was causing them trouble – or their debt situation more generally – translated into a general panic, clouding their judgement about which debts were better or worse than others, and in which ways.

This emotional overload, combined with low awareness about the conditions attached to certain debt products discussed above, explains why some of the rankings from the focus groups appear wildly inaccurate to the trained eye. This does not mean that people’s assessment of their situation is invalid, but being able to weigh up the pros and cons of different debts and prioritise them is an essential part of being able to deal with them. If people are not able to do this – because of either lack information or their mental state, or likely a combination of both – then this should be an issue of concern to debt advisers, who should look at ways to address this.

Conclusion

For many people, debt is more of an emotional and social crisis than a financial one, with impacts on mental wellbeing and relationships, for example, dominating people’s experience and cutting across specific types of debt. This can pose difficulties for debt advisers, whose role is traditionally to manage the financial and legal side of a person’s debt situation. But without paying attention to the ‘softer’ measures of impact, there is a risk of failing to address the very thing that makes debt problematic for many people.

Using our debt harm index to assess the impact of debt using a broad range of measures allows us not only to compare debts, and look at where the problems are occurring, but also to recognise that people tend to respond to ‘debt situations’ holistically, and that this in turn is deeply linked to their personal ability to cope. Although some debts are generally agreed to have a high or low impact (payday loans and arrears feature heavily as high-impact debts, while credit union loans and student loans are very low impact), the effect of different debts is not fixed. It varies between individuals, and is affected by a number of factors – including having the opportunity to negotiate with creditors, how aware people are of the steps they can take and of the terms and conditions of their debts, how well supported they are and how many debts they are dealing with – all of which influence how able people are to self-help.

Another big factor in this variation is people’s emotional resilience. The debt problems of many people we spoke to had left their emotional wellbeing in tatters, leaving them badly equipped to make decisions and take control of their debt situation. This is something that will not necessarily be solved by reducing the financial burden of debt. It can also lead to debt advisers being placed in a position of paternalism, whereby debt advisers are relied on to ‘fix’ people’s financial problems for them, and in doing so also improve their overall health and wellbeing. Creditors seem to be complicit in this, as many will not deal with clients directly but rather seek to negotiate with debt advisers.

When they are at crisis point, it is understandable that many people may be overwhelmed and look for someone to ‘take over’, but this does nothing to foster long-term financial capability, and can create dependency on advice services. By turning this approach around, and improving emotional wellbeing and confidence first, debt support can better help people to help themselves.