One third of borrowers in 2015 will use loans to cover debts

Over a third of the people looking to borrow this year will use the money to repay existing debts, according to a new report from Cuna Mutual, the largest specialist insurer of the mutual sector.

The financial vulnerability of consumers now is higher than in 2012, as people feel a misplaced confidence in the economic situation, the report, ‘Financial Fragility and Confidence’ found.

With a bigger exposure to debt stemming from a reduction in debt protection, consumers are not ready to face a ‘debt tsunami’ when interest rates rise. Just a few safeguard their loans.

The proportion of consumers who had made provisions for a potential default was only 8 per cent, compared to 17 per cent in 2012.The main reason for the low take-up in safeguarding debt is the toxic reputation of payment protection insurance (PPI)- the biggest mis-selling scandal in the history of financial services.

With an increased confidence in job security (10 per cent improvement on 2012) consumers are less likely to protect their financial commitments-despite the report finding that 41 per cent of borrowers would be unable to repay their debts if they lost their job.

The over 55s believe they would be less able to cope with unforeseen expenses than in 2012. In 2014, 35 per cent of the over 55s believed they would not be able to meet an unplanned £2,000 expense within 30 days, in 2012 the figure was only 23 per cent.

In a regional comparison, there are considerable differences as well. On one hand, consumers in the North East of England and Yorkshire had significantly improved their ability to deal with financial shocks (a 9 per cent and 7 per cent improvement respectively over 2012).

On the other, the proportion of people in Scotland and Wales expressing inability to meet unforeseen cost has jumped to 42 per cent from 33 per cent and to 47 per cent from 39 per cent in 2012, respectively.