UK debt bubble: Borrowing for new cars, holidays and consumer items highest in a decade

Unsecured lending to UK households in January rose at the fastest pace in a decade, according to the Bank of England (BoE). At £1.6bn (€2.05bn, $2.23bn), the loans were at a level not seen since 2006. This was also 45% more than the previous month's figure of £1.1bn.

Economists described the credit expansion as a rediscovered "zeal for borrowing". While in January alone UK households spent £500m on their credit cards, in total they owe £63.8bn on the cards. Apart from this, other loans by UK households add up to £115.7bn, excluding mortgages, as low interest rates continue to increase the demand for unsecured credit.

Economists warned that such high borrowings by UK households, which were exceeding £1bn every month, could lead to a debt bubble. It is reported that the households borrowed to finance new cars, holidays and big-ticket consumer items.

Samuel Tombs, chief economist of Pantheon Macro-economics, said: "What we are seeing is the early stages of what could potentially be another debt problem. I think the Bank of England will have to act fairly soon this year to cool lending."

BoE policymakers are worried that the rising borrowing would harm Britons in case of a financial downturn. As the British economy recovers, the BoE's financial policy committee has said that it could increase the amount of money that banks are required to reserve to account for their lending.

A few debt charities too have expressed concern over the rise in borrowing. Martin Beck, senior economic adviser to EY Item Club, one such debt charity said: "The Bank of England has expressed increasing concern about the frothiness of the lending data in recent months, so while the FPC may not intervene in the buy-to-let market, broader action is possible."

Apart from credit cards and loans, January also saw an uptick in mortgage approvals. At 75,581 approvals, the figure marked the highest level in two years. Some analysts have opined that these would fall post the new stamp duty charge.

Ruth Miller of Capital Economics said: "The stamp duty surcharge should only provide a temporary stimulus to the housing market. Once this temporary effect fades, buyer demand will probably fall, easing the current upward pressure on mortgage approvals over the remainder of the year."

A few economists said the only way to curb the increased borrowing is to raise the interest rate which currently stands at just 0.5%.