With the Bank of England raising its base rate, the cost of borrowing is set to rise. Does this spell the end for ultra-low-rate loans?
As you've probably heard by now, last Thursday the Bank of England hiked its base rate by 0.25% to 5% a year. Naturally, some lenders have already sprung into action by raising the interest rates which they charge borrowers.
In particular, HBOS (Halifax/Bank of Scotland), the UK's largest mortgage lender, has announced that its standard variable rate (the rate paid by all borrowers who don't have a special-rate deal) is to rise to 7% a year. For new borrowers, this rate change takes effect immediately; for existing borrowers, it happens on 1 December.
As well as rising mortgage rates, you can also expect the cost of borrowing using credit cards, overdrafts and personal loans to increase. I'll cover the rising cost of credit cards in a later article, so here I plan to examine the cost of unsecured personal loans. (An unsecured loan isn't secured against your home or any other asset, so the roof over your head isn't at risk if you can't keep up the monthly repayments.)
To be honest, with the base rate now at 5%, it looks as though it's curtains for the ultra-low loan rates that we've been enjoying for the past two years. For example, here's a selection of the cheapest personal loans available at present (courtesy of independent financial researcher Moneyfacts, which powers the Fool's search engines for credit cards, personal loans, savings accounts and so on):
Best Buy loans: £5,000 over three years,
without payment protection insurance (PPI)
Lender | Total | Typical |
|---|---|---|
| 5,435.28 | 5.6 | |
Northern Rock | 5,439.96 | 5.7 |
Abbey | 5,447.52 | 5.8 |
Best Buy loans: £10,000 over five years,
without PPI
Lender | Total | Typical |
|---|---|---|
| 11,460.60 | 5.6 | |
Northern Rock | 11,476.20 | 5.7 |
Abbey | 11,502.60 | 5.8 |
As you can see, it's possible to borrow money at a typical rate which is fixed for five years at only 0.6% above the base rate. Frankly, this is a crazy offer, because these loans are cheaper than most home-buyer mortgages! What's more, banks can expect to write off, say, 1% of their borrowing to bad debts, so there's absolutely no profit margin in these loans at all. Indeed, the only reason why banks can lend at these ultra-low rates is because of the excessive profits they make from selling massively overpriced PPI.
In summary, I would expect these Best Buy personal loan rates to be withdrawn fairly soon and replaced with higher rates, perhaps even before Christmas or the New Year. Hence, if you need a cheap loan to pay for a car, holiday, home improvements, wedding (or divorce!), I'd act now while stocks last. Lastly, before you rush off, read these twelve tips on finding the perfect personal loan.
More: Use the Fool to find first-class personal loans, credit cards, mortgages and current accounts!
Disclosure: Cliff owns shares in HBOS.