For the first time in a decade, the Bank of England has increased its interest base rate by 0.25%.
Quick Loans Express explores how the bank interest rates rise will affect the payday loan industry.
Bank Interest Rates Rise Will End Cheap Borrowing Rates
There are millions of borrowers in the UK who have never experienced a rise in interest rates during their adult life. The Bank of England has recently raised its interest base rate from an all-time low 0.25%, to 0.5%. For many people, who borrowed heavily and took advantage of the cheapest borrowing rates in history, the rate hike could now spell trouble. Many are already juggling their finances by having to repay consumer debt. The smallest increase in repayments could see them not having enough money to live comfortably.
How will the bank interest rates rise impact society?
The majority of consumer credit that most people borrow is with a fixed rate of interest. In the past, credit was so widely available to consumers, that many over borrowed. This means that they survive the month with no money to spare. The slightest upset in their regular finances turns them to quick loans to cover basic living costs.
Those who have bought houses recently, taking advantage of low-interest variable rate mortgages will see a difference in their finances. Estimates suggest that this applies to 11% of mortgage holders, a much lower figure than ten years ago. This is because the number of people owning their own houses has dropped.
Will fixed rate mortgage holders have to pay more?
Most fixed rate mortgage holders will not see any rise in their monthly mortgage repayments. Of the 57% of people who have a fixed rate mortgage, many are on 2 year fixes. This rate will become more expensive when the mortgage term expires. If these customers do not remortgage and take another fixed rate deal, then they will end up paying much more if they go on to their lender’s standard variable rate.
The average mortgage in the UK is for £175,000. One example of a popular mortgage product is the Nationwide’s base mortgage rate tracker. The 500,000 customers who currently have this kind of mortgage will see their monthly repayments rise by £22. This will take their monthly repayment from £763 to £785 if their mortgage were a £175,000 loan. This may not sound like a big increase, but for many who are already struggling to repay their other lines of consumer credit, it could mean trouble. This could result in more people using loans to pay off bills.
So what have we learned so far?
- The Bank of England has increased its base rate by 0.25% to 0.5%
- For many who are struggling to pay their debts, the rise will get them into financial difficulty
- The majority of consumer credit will be unaffected as the rates are fixed
- Customers with variable rate mortgages will see an increase in their repayments
- Many fixed rate mortgage holders are on short-term deals, and their repayments will increase in the future
- Customers with an average £175,000 mortgage will see their repayments increase by around £22
How will the interest rise affect payday loan companies?
Payday loan companies could see the demand for their product rise in the near future if people feel squeezed by the increase in their monthly outgoings. Debt charities have reported that many people are living on a ‘knife edge’ and struggling to pay their bills. Their priority bill will be their mortgage, so they may need to take quick cash loans more frequently to cover unexpected emergencies as it will be difficult for people to save any money to cover unforeseen expenses.
Not so many years ago the interest and fees on payday loans could amount to many times the original loan. Thanks to the strict regulation of the industry, the amount of interest allowed to be charged by payday loan companies has been considerably reduced. Companies who now wish to operate in the UK must do so under the strict FCA regulations imposed on them, and their prices have been reduced.
There is stiff competition for business, and payday loan companies now offer reasonable interest rates for such high risk, short term loans. The bank interest rates rise should mean that payday loans and the cost of all borrowing will become slightly more expensive. Increased demand for payday loans online could see even more lenders entering the payday loan industry, and competition can keep prices low as companies vie for business.
What does the Bank hope to achieve by increasing interest rates?
Over the last few years, the government’s austerity measures have left the economy in a devastated state. The Bank hopes that by raising the base interest rate, it will be able to have an impact on consumer debt. This, in turn, will lower the high 3% inflation rate to its target rate of 2%.
Although the economy is not in a good state, with high levels of unemployment and the longest period without wage increases for 150 years, the Bank was obliged to use its only tool to lower inflation, even if it means that many people will fall into debt. The main reason for the rise in inflation has been due to the rate of sterling against foreign currencies.
Bank interest rates rise and payday loans – Conclusions
The rise in the interest base rate from the Bank of England has been expected for a long time. Mortgage lenders carry out strict affordability checks on people trying to take out mortgages to make sure that they can still pay their repayments despite some changes to their finances. Most people will not be badly affected by the rise, but debt charities have warned that some people will not be able to sustain even such a small rise in their monthly outgoings.
Payday loan prices have come down a lot in recent years as companies compete for business. The effect of the bank interest rates rise on the payday loan industry could mean that loan companies will be busier and competition always means a better market for the consumer as companies compete for business. The cost of all borrowing will have to rise.