In an attempt to bring down inflation and cut consumer credit, the Bank of England has raised its interest base rate. How will rising interest rates affect people who are looking into borrowing money and taking out personal loans?
- The rise in the Bank’s base rate
- How interest rates have performed in the past
- The years of cheap consumer credit
- The reluctance of the Bank to raise interest rates
- How the increase will affect personal loans
- The effect on existing personal loans
- When will the cost of borrowing increase
The Bank of England has increased its official bank rate from 0.25% to 0.5%. This increase is the first since July 2007. It will be the beginning of a few more increases over the coming three years that will take the base rate up to 1%. The Monetary Policy Committee voted 7:2 in favour of the rise. The committee justified its decision by pointing out high inflation, stronger economic growth and record low unemployment.
UK Interest Rate History and Rising Interest Rates
The last rise in interest rates was in July 2007 when they went from 5.5% to 5.75%. During the previous ten years, since the Bank of England became independent, the interest rates would rise and fall from a high of 7.5% in June 1998 to a low of 3.5% in July 2003. During the 2007 recession, the rising interest rates dropped from 5% to 0.5%. The Bank slashed interest rates in a bid to save Britain from the recession. It was meant to be a temporary decision. However, the Bank has been unable to put them back up. The result was another cut in 2006 by 0.25%, after the Brexit vote to give the economy some stability.
Many people took advantage of the amount of cheap credit that was made available to them. They rushed and began borrowing money on credit cards, car finance and personal loans. Bank of England data revealed that consumer credit levels had risen 10% on the year since June. It reached dangerously high levels of £201 billion. The situation warned the banks to hold more capital during the summer to avoid another financial crisis. The FCA estimates that one in six people with high consumer debts is in financial difficulty.
The Bank is reluctant to raise the interest rates
The Bank has not raised interest rates to lower inflation until recently as it argued that the culprit for rising inflation was Brexit. The prices of food, fuel and other imported goods inreased due to the weak pound, which the Bank says has reached its peak. In the Bank’s quarterly inflation report, which they released at the same time as the increase in the base rate, the Bank has estimated that inflation will reach its peak during this month, reaching 3.2%. Another reason for the delay in raising the interest rate was the lack of wage growth. During September, wage growth was 2.1% while inflation hit 3%. The Bank predicts that we will see wage growth increased over the following year and there are already signs of this happening.
- The official Bank of England interest base rate has increased to 0.5%
- It is the first rise in interest rates for ten years
- The Bank temporarily slashed rates in 2007 in an attempt to save Britain from the recession
- The interest rates used to fluctuate every few months
- UK consumer credit is at dangerously high levels
- People took advantage of low-interest rates and borrowed heavily
- Inflation caused by Brexit and slow wage growth were reasons that the Bank delayed the increase
How will Bank of England Base Rate Increase Affect Personal Loans?
It is likely that the interest rates on fixed-rate personal loans will have to increase. The interest charged on a £5,000 personal loan was 9.3% at the time of the UK referendum. Interst rates on borrowing money fell to 8% once the Bank reduced the base rate by 0.25%. The fact that the reduction has been reversed means that the rising interest rates that lenders charge for personal loans will probably rise again. The Bank of England has voiced concerns about the amount of unsecured consumer debt. They would likely see a rise in the cost of borrowing as a benefit, even for those taking out low interest personal loans.
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There are two kinds of personal loan. One is with a fixed agreed interest rate, and the other is a variable rising interest rate which is sensitive to any changes in the Bank’s base rate. Most of personal loans are of the fixed rate kind. Borrowing money means you pay an additional fixed agreed amount of interest added, divided into several monthly repayments. An existing personal loan with a variable interest rate will see a small monthly increase in the repayments.
As the base rate has now risen and lenders are under pressure to reduce borrowing, there will most certainly be a rise in bank interest rates coming soon. If you are considering taking out a personal loan, then it is a good idea to act quickly. When lenders advertise new loan rates, they often specify the amount of money that they will be lending at that rate. Chances are they will not have lent all the money at that rate yet. They will continue to offer those personal loan products at the advertised rate until they sell out. This could be in a matter of days, weeks or months.
Conclusion – The Cost of Borrowing
Consumer credit has worried the Bank of England for some time. The levels of consumer debt due to the amount of people borrowing money, have just surpassed the amount at the time of the financial crisis. However, the high street banks are in a much better position than they were at that time. The last decade of very low-cost borrowing was not meant to be in place for as long as it was. Yet the economy was too unstable for the Bank to institute rising interest rates. People have expected the rise has been expected for a long time. Further increases over the next three years will bring it back up to 1%.
All borrowing, even guarantor loans with low apr rates, will now increase to accommodate the rising interest rates. This will include credit card borrowing and personal loans. Variable rate personal loan holders will see an increase in their monthly payments as the rate follows the Bank’s base rate. Existing fixed rate personal loans will not be affected by the rise. Their repayment terms have already been agreed and calculated. Anyone wishing to take out a personal loan should do so quickly to take advantage of any existing deals with the old lower rate.