Families' debt levels are at their worst in at least two-and-a-half years despite strong efforts to shore up their savings, a report has found.
Cash in hand: More people are turning to payday lenders despite crippling rates of interest
Around one in 20 households is "relying" on controversial payday
loans to get by, according to an authoritative report into family finances.
The finding comes less than two weeks after the Office of Fair Trading
referred the £2bn industry to the Competition Commission after uncovering
evidence of "widespread irresponsible lending".
That announcement was followed last week by a warning from the Financial
Conduct Authority that it was considering a total advertising ban as one of
the options when it takes over regulation of the sector next April.
Regulators are concerned that lenders do not properly check whether borrowers
can repay the loans, some of which carry annual interest rates of more than
5,800pc, and allow them to take multiple loans. Debt charities have come
across some borrowers with more than 70 payday loans.
The reliance of households on payday loans was revealed in the Aviva Family
Finances Report today.
It also disclosed that household debt, not including mortgages, had risen to
almost £13,000 - the largest sum since the study began tracking it in
January 2011.
Average household debt has jumped from just over £9,000 a year ago to £12,834, including around £2,011 borrowed from friends and family, £2,006 piled onto credit cards and £1,959 in personal loans.
Low interest rates have helped to push the cost of borrowing down, although 5pc of families said they are relying on expensive payday loans to get by and one in 33 (3pc) are using pawnbrokers.
Less than half (45pc) of families said they are managing to make monthly debt repayments, falling back from 57pc one year ago.
At the same time, Aviva reported a big uplift in households trying to put money away in savings, with less than one third (31pc) of families saving nothing each month for the first time since the series began.
Families are putting £96 a month away typically, which is also a new high for Aviva's records. The report suggested the increase has been boosted by an improvement in household income, which is 5pc higher than a year ago at around £2,108.
Nearly three-quarters of families (72pc) receive an income from a primary breadwinner's job, up from 70pc at the start of the year, and the number of families with two wages coming in also appears to be on the rise, the report said.
However, the determination to put more cash away comes at a time when savings rates have been plummeting.
Experts have partly put the tumbling rates down to a Government scheme called Funding for Lending, which has given banks access to cheap finance to help borrowers and made them less reliant on attracting savers' deposits.
Despite falling savings rates, take-up of tax-free cash Isas among families has increased from 36pc holding the savings products a year ago to 41pc.
The percentage of couples who are planning to start a family and receive an income from rents has doubled to 4pc in the last six months, suggesting more people are turning to renting out spare rooms or investing in buy-to-let properties in the tough savings environment, the report said.
Peter Tutton, head of policy at debt charity StepChange, said the report showed the "increasingly fragile nature" of many household budgets.
He said: "That 5pc of families now rely on payday loans highlights how for a substantial proportion of the population simply meeting essential living costs is becoming increasingly unaffordable.
"While the increase in average incomes should provide some respite for families' finances, the reality remains that we are seeing increasing numbers of people falling behind on essential bills like rent, gas and electricity and council tax."
The report took its findings from more than 18,000 people.
Louise Colley, protection distribution director for Aviva, said: "Building a savings pot is a fantastic step, but if debts are growing, families need to consider which is the more pressing need."
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