Are Personal Loan Rates Set to Increase?
Fears Regarding Loan Defaults Increases the Cost of Borrowing
Jan 4, 2009
The credit crunch is beginning to affect peoples' lives. Increasing numbers struggle with bad credit, making personal loans inaccessible. The more surprising news is that those with perfect credit are now finding that borrowing costs are rising.
Evidence of Rising Mortgage, Credit Card and Personal Loan Rates
The Bank of England has reduced interest rates by 4% in the last few months, yet the cost of borrowing is rising for many people who were hoping to consolidate debt.
According to Moneysupermarket.com, "The average rate a borrower pays on a £5,000 personal loan has risen from 7.92% in the first week of September to 8.44% now." This means that the difference between Bank of England base rates and the rate offered by the average lender currently stands at 6.44%. It stood at only 2.92% just a few months ago.
One in five Egg credit card holders, classified as higher risk customers, have been told that the rate of APR on credit card debt is increasing to 26.9%. This serves to illustrate how concerned the financial institutions are over the state of the global economy. Other credit card providers are set to follow shortly.
Interest rates for savers have fallen to levels that barely keep pace with the rate of inflation. Many people with variable rate mortgages and secured loans have yet to see the interest rate reductions they were expecting. Personal loan rates weren't nearly as slow to react when interest rate increases were taking place.
Banks Blame Rising Credit Card and Personal Loan Rates on the Recession
Banks lent money to borrowers who had no chance of making the repayments. For example, self certification mortgages were designed to assist the self-employed, yet were sold to employed people who had a fixed monthly income and bad credit.
When the bubble burst, the number of personal loan defaults grew exponentially. Despite being bailed-out by £37 billion of tax payers money, banks are now reluctant to lend to people because of the recession and rising levels of unemployment which their lending practices created.
Sean Gardner, founder of MoneyExpert.com, said: "The Bank of England has a battle on its hands to restore confidence in the credit markets when lenders react to three rate cuts by actually increasing rates." Since then, a further 4% of interest rate cuts have taken place and the cost of borrowing is still increasing.
The banks have sought to blame high interest on a stubbornly high LIBOR rate, which is the rate that banks borrow money. However, David Keeble, head of fixed-income strategy in London at Calyon said “There’s no reason for the easing in LIBOR rates not to continue. The banking sector is more stable and cash is coming into the system.”
Financial institutions seek to stifle the demand for higher risk lending by increasing personal loan rates. This is happening at the very time that banks should be lending to boost economic recovery. Sadly, those seeking a personal loan or to use their credit card will have to pay more to borrow money at the very time that they are struggling most.
Those that found this article useful may also be interested in reading about the pros and cons of secured loans and avoiding loan sharks.
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