Coronavirus has caused upheaval in many people’s lives. From redundancy to bereavement, to social isolation, the pandemic has created uncertainty and complexity across the country. And this extends to our financial lives as well – many of us have experienced negative financial impacts as a result of Covid-19.
Financial Hardship from COVID
There are two key reasons that coronavirus is wreaking financial havoc on ordinary people.
1) People are facing a hit to their financial resilience as a result of the crisis.
A significant proportion of people were already struggling money-wise before the pandemic. Approximately a third of all UK adults have less than £2000 of cash savings, and one in eight have no cash savings at all. Coronavirus has made this worse by hitting jobs and income, making pre-existing debt problematic.
2) There have been impacts on mental health.
Economic uncertainty, increased disease, bereavement, and social isolation, all have a significant impact on mental health.
Mental health problems are a key driver of financial vulnerability. Research from the Money and Mental health policy institute suggested that 48% of people with mental health problems were unable to weigh up pros and cons of a loan product.
As a result, the impacts on mental health could increase the risk that people make financial decisions not in their best interests.
What’s more, we’re facing a second wave of COVID and the economic challenges that come with another lockdown. This means that there may be further drops in employment and growth – adversely impacting financial resilience and mental health – and deeper damage for people who are in debt. We don’t yet know what government support is going to look like next year.
Government support schemes and payment holidays have provided support to households in difficulty. Many of these were due to stop at the end of October, but have been extended for the second lockdown.
Job Retention Scheme
Employees received 80% of their salary for hours not worked if they were on furlough.The government has extended applications for its Covid-19 support schemes and the future fund to 31 January 2021 ahead of the start of England’s second lockdown on Thursday 5 November.
At the start of lockdown in March the government increased some help from benefits:
- the standard rate for Universal Credit was increased by £20 a week;
- people getting Council Tax Support an extra £150 this year.
In March and April, the FCA introduced payment breaks across almost all consumer debt. A 3 month payment holiday was available for most debts, and then a second 3 month break if necessary. The FCA is proposing to extend payment breaks for people who have had less than 6 months break for mortgages, credit cards, car finances, most loans, and catalogues. This is just a proposal but it’s likely to go live in the next week or two.
The complete ban on evictions for rent arrears ended in September. But landlords will have to give 6 months notice of eviction to most tenants.
Ten percent of mortgage borrowers had taken a mortgage payment holiday in April, according to survey results. Data from UK Finance suggests this figure rose to slightly over one in six mortgages in June.
If your finances were fine at the start of 2020, you may just need some temporary help from your lenders while things get back to normal for you.
StepChange have introduced a Coronavirus Payment Plan (CVPP). This is a DMP that will only last 12 months, aimed at allowing people time to get their finances back on track.
A particularly bitter aspect of the financial hardship caused by COVID is that it is not universal. Employees who have been able to work from home have retained 100% of their income, while reducing expenditure to around 60-70% of usual monthly outgoings, due to lack of commute and socialising costs.
As such, the financial well-being gap has widened. A quarter (25%) of people have actually increased their monthly savings during the coronavirus pandemic, while the number of people not saving at all has almost doubled: one in five people (21%) are not currently saving, compared to just over one in ten (12%) in 2019, according to new research by the Yorkshire Building Society.
Any savings you have managed to put away sadly won’t be growing much. UK savings rates are at a record low, with savers being offered only 0.01% interest on the high street for easy access deals. According to the Bank the average rate on instantly available deposits has fallen to just 0.13%. The NS&I currently has the best instant access savings interest rates, at 1.00%.
Borrowing during COVID-19
Should I borrow to tie me over?
Borrowing money is an important part of the UK economy, and millions of people borrow every day in the UK to help meet unexpected costs, smooth expenditure and make essential purchases they could not otherwise afford.
However, when things go wrong, and people get trapped in problem debts, borrowing can result in people ending up in a cycle of debt and unable to meet a basic standard of living. It’s always better to use your emergency fund, dip into your savings, or pursue the option of interest free credit.
If you really can’t access the money you need to pay an unforeseen bill, it is crucial to understand whether you’re in a position to borrow safely, or whether you’re in too much of a vulnerable position.
Vulnerability Drivers – are you too vulnerable to borrow?
I’ve identified 4 key COVID-related drivers which increase the risk of financial vulnerability.
Health conditions or illnesses that affect their ability to carry out day-to-day tasks.
- Life event.
Major life events such as bereavement, job-loss, or relationship break-down.
Low ability to withstand financial shocks.
Low knowledge of financial matters, low confidence in managing money, or low capability in other relevant skills such as literacy or digital skills.
Vulnerability has sharply increased in the UK due to the pandemic. One and a half million more people were displaying signs of vulnerability in July, compared to February. The percentage of adults with low financial resilience had grown to 23%: that’s 12 million adults.
If any of these drivers align with your circumstances, you should avoid further borrowing. These factors could increase the risk that you make financial decisions that will damage you further down the road.
Who’s protecting you from borrowing when you’re too vulnerable?
Don’t worry – it’s not just down to you to determine whether you’re not in the situation to borrow money. The Financial Conduct Authority (FCA) has introduced measures which mean that lenders now need to be far more exact with their analysis of whether you can afford a loan. The FCA will intervene to resolve significant issues with vulnerable borrowers.
If you do decide to borrow, don’t be fooled by appealing new models of borrowing. There is currently a growth of businesses offering possible alternatives to high cost loans. These often take the form of salary advances and buy-now-pay-later schemes, such as Klarna. However, many of these lie outside of the Financial Conduct Authority’s regulation. They therefore may harm customers in the long run.
An example is Employee Salary Advance Schemes.This model is extremely risky; the regulations don’t require the firms to perform an affordability check. The firms don’t check whether the people they are lending money to will be able to pay it back. This may mean that people take out a loan unsuitable for their needs, and not be able to pay it back.
Furthermore, there’s the risk that if an employee takes their salary early, it is more likely that they will run short towards the end of the next pay-day, potentially leading to a cycle of repeat advances and escalating fees.
The financial hardship is going to continue into 2021, with another lockdown and ongoing economic repercussions from the virus. Keeping on top of the government support available, managing your budget and savings wisely is going to be more important than ever. Keep vigilant and know that help is always available.