The difference between the Bank of England base rate and the average interest on unsecured personal loans or credit cards has been gaining ground rapidly over the last 18 months. At a time when interest on bank savings is negligible and jobs are threatened, people are more likely to borrow money but they’ll be paying even more for the privilege. If you factor in the gloomy prospect of zero percent pay rises for most people, it means now is a costly time to for those wanting credit.
Banks and credit card companies are desperate to claw back huge losses by keeping the interest rates on their loans at roughly the same level for the last four years, despite the fact base rates have been dropping. The difference is money in the back pocket for the lenders.
True, lenders will be dealing with more defaults in the current climate and so one might expect loans to become a little more expensive as a result, but even those with perfect credit histories are finding it hard to get decent rates.
Longer term gilt/treasury yields are creeping up and up as the market combines concerns over massive issuance (of gilts)/lack of demand (of gilts) and the potential for inflation. These yields have a direct impact on the wholesale markets – the cost to banks to lend to you, me and each other. As with the risk of default, one would expect this to lead to higher rates, but it’s the extent of the difference versus the base rate that smacks of the banks raking in higher margins.
There are plenty of parties who wish the banks to rebuild their balance sheets as fast as possible, and higher margins from their lending books is one way to achieve this. However, the approach can easily backfire. Remember quantitative easing? This was all about kickstarting the economy by reducing borrowing costs, not increasing them as we are seeing!
Our advice is keep your credit history as clean as possible. Check your credit history to ensure the information about you is correct; you can get a free credit check at www.experian.co.uk. Search online to ensure you get the best deal possible.
