As it gets cheaper to borrow money, people are increasingly over-extendingthemselves and finding they are unable to cope with their debt burden,writes Gretchen Friemann

As consumers rush to take advantage of record low interest rates, money advisers are warning that an increasing number of people are in danger of being overwhelmed by multiple debt burdens.

Last year, the Money Advice and Budgeting Service (MABS) witnessed a twofold increase in the number of people seeking help to manage personal debt as plummeting lending rates on personal loans, credit cards and top-up mortgages proved irresistible.

And last week's 50 basis point cut in European Central Bank interest rates threatens to propel Ireland's private-sector credit levels, which last year reached €143 billion, to yet more record-breaking highs as incentives to save all but dry up.

The boom in lending has prompted the Director of Consumer Affairs, Ms Carmel Foley, to exhort borrowers to think twice before topping up their mortgages to pay off more expensive loans.

In her annual report published last week, she stated: "Consumers should be aware that consolidating multiple debts can lead to debts being spread over a much longer period of time. Should consumers again fall into further debts, their homes may be at risk. Consumers should seek advice before availing of these products."

Such warnings have little impact on the 22,500 people already attending MABS offices across the State, where debt advice is available free of charge. These casualties of the borrowing boom are mainly from low-income backgrounds where the ratio of debt to disposable income is the most corrosive.

But in the past two years, MABS has reported steady increases in the number of middle-income earners seeking advice on debt management.

Mr Liam Edwards, national co-ordinator at MABS, attributes this to the explosion in lending over the past five years as well as to greater community awareness of the debt advisory service, which was established in 1992 by the Department of Social and Family Affairs.

Mr Edwards said: "It's a good thing that we are seeing high increases in clients because it shows people are willing to tackle the problem of debt rather than ignoring it as they did 10 years ago, when the only main sources of advice were the lending institutions."

This may be true but money advisers working in MABS offices in Dublin report alarming increases in the number of new clients dealing with multiple debt burdens. In the Blanchardstown and Dún Laoghaire branches, the jump in new clients since the start of the year is estimated at 30 per cent.

According to the money adviser co-ordinator at the MABS office in Dún Laoghaire, Ms Catherine Collins, "the situation is becoming quite serious". "We are seeing a lot more young people in their 20s and 30s coming in with a variety of different debts, which they just can't manage properly. Clients who own two or three credit cards are also increasing," she said.

"The problem is more credit is available these days and people are availing of it. Unfortunately, the trend in those unable to cope with their debts seems to be getting worse rather than better."

The story is the same across the city in the Blanchardstown office where money adviser Ms Ann Somers blames the low credit card interest rates and the hyper-consumerist lifestyle inherited from the days of the Celtic Tiger for the surge in clients.

She said: "We are seeing a big increase in people struggling with multiple debts. It seems people are taking out more credit cards to facilitate car loans or buy items such as mobile phones. The emotional burden and physical stress on those who can't then pay off their debts is huge. A number of people we see would have a medical condition; either depression or heart problems because of the pressure of these debts."

Over the past five years, private-sector debt in Ireland has rocketed. In 1997 the ratio of private credit to GDP was 29.9 per cent. By the end of last year, this had soared to nearly 40 per cent.

Commercial and residential property have been the main drivers of this credit surge. Although Ireland does not calculate the exact level of personal debt, economists estimate that 65 per cent of our personal disposable income is consumed by mortgage repayments.

Mr Austin Hughes, chief economist with IIB Bank, estimates that, with the addition of other loans and credit facilities, personal debt accounts for about 87 per cent of personal disposable income.

Mr David Duffy, an economist with the ESRI, puts the ratio at 77 per cent.

It's clear from both calculations that we are borrowing at greater levels than before. But Mr Hughes argues the rising debt burden is currently offset by the appreciation in house prices, the still relatively high employment levels and the low cost of borrowing.

So does this mean consumers can keep on borrowing at current levels? Not necessarily.

Mr Duffy, although not concerned at the lending boom, points to the high exposure of the economy to the housing market, as well as the possible threat of deflation.

Discounting the prospect of negative equity, he said: "If housing prices or employment levels receive a shock, then that could affect people's ability to finance their debt. So far, however, domestic asset wealth is still high and the employment rates are relatively strong."

What could have an even greater impact is the arrival of deflation, which means the value of money decreases over time. If this happens, real debt repayments will eat even further into disposable incomes.

And, as Mr Duffy points out, the risk of deflation increases "particularly when interest rates fall against a strengthening euro".

As more bank and lending institutions move to cut the price of borrowing, consumers will have more of an incentive to release equity from their mortgages or take out a loan or credit facility.

Heavily indebted consumers must now weigh up the risks of further borrowing in a climate where many economic indicators are pointing south.