To manage Debt, Advantage of Low Rates are Not Being Taken by Europeans

Before there is any serious turn in the monetary policy tide, Europeans never had a better opportunity to sort out their debt after years of record-low interest rates. However a recent study has found that the problem is that Europeans have not taken advantage of the situation.

According to a survey by ING published Wednesday, advantages in a prolonged low interest regime such as using savings to pay down debt, reducing payments or the chance to take on new loans, refinance or expand existing ones at lower borrowing costs have not been taken by almost two thirds of people in the region.

While only eight percent paid off part of their mortgage, a mere 11 percent of those Europeans who have opted to save less due to low rates have used that spare cash to clear a loan.

Consumers may struggle when rates eventually do increase, indicates the findings of the study. Rising inflation pressures may mean loose monetary policy is coming closer to an end even though the Bank of England is predicted to keep its benchmark at a record 0.25 percent for at least another two years and the European Central Bank has extended its quantitative easing plan.

“Considering that 50 percent of people in Europe hold debt, more could be taking advantage of low rates to pay down,” researchers led by senior economist Ian Bright said. “Reducing debt allows greater flexibility if there is an unexpected expense, or if other costs rise.”

Many people remain unprepared for financial shocks such as losing a job even eight years after the financial crisis, the ING report suggests. The detailed figures are also a source of concern. Among all those Europeans that had some form of savings in the banks, less than three months take-home pay stashed away n savings was reported by only 36 percent of the savers while the report found that almost a third of respondents had no savings at all.

Even though they have savings which could pay off at least some of what they owe, over a quarter of Europeans continue to hold on to their loans, the survey found. According to 2014 research by the University of Nottingham, by holding on to their loans, around 650 pounds ($800) of unnecessary interest charges each year as a result of doing so is being paid by the average U.K. household.  And the attitude has not changed since that report.

15,000 people in 13 European countries, the U.S. and Australia were included in the poll and it was conducted in October of last year. The study found that with the U.S. at 16 percent and Australia at 23 percent, both non-European nations had a smaller portion of households with no savings than the European average of 29 percent.

(Adapted from Bloomberg)

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Categories: Economy & Finance

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