The number of households struggling to pay their debts will rise by 700,000 in the next four years, according to a new report.

Debt management firm Arrow Global’s research shows that 4m UK households are currently in default on their payments.

Lenders will have the confidence to increase lending

But that number is set to increase by 17% by 2020, driven by consumers having the confidence to take on more debt and lenders having the confidence to increase lending.

Arrow Global’s prediction is partly based on the Office for Budget Responsibility’s forecast that consumer debt will hit £640bn by 2020 – that’s £24,000 for every household.

The fastest growing component of that will be unsecured debt, which is set to increase by 49% over the next four years.

Tom Drury, CEO of Arrow Global, said: “Low interest rates and reduced lending have led to a fall in the consumer debt burden since the financial crisis.

“However, the recent upturn in consumer confidence means this trend is ending as overall lending increases and as interest rates rise, defaults will start to increase from their current low levels.

Consumers need to be given the best advice in managing their finances

“The rise in the number of individuals in default will make professional debt management all the more important for both lenders and the borrowers in difficulty.

“The consumer debt industry needs to work closely with advisory consumer bodies now to plan for this rise, so borrowers in difficulty are given the best advice and help in managing their finances.”

Caroline Siarkiewicz of the Money Advice Service warned that borrowers they could be in for a “nasty shock” when interest rates finally rise.

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“Consumer borrowing is at a record level and that combined with any potential rise in interest rates could be putting a large number of people at risk,” she said.

“Although it is unlikely that interest rates will rise until next year, people who have taken out credit may be hit with a nasty shock when this does happen, and find themselves unable to afford their repayments.

“We are working with both debt advice providers and creditors to encourage people to prepare for any rate rises.”

She said the Money Advice Service has an online debt advice locator tool to help people source free and impartial financial advice.

Arrow Global’s first economic forecast of consumer debt defaults will form part of a major report called ‘Debt Britain: The Big Picture’, which will be published later this year.