Debt Management Blog

Unsecured Loans

 Bank of England highlights rise in cost

The quarterly bulletin report from the Bank of England shows the gap between bank rate and rates paid by borrowers has widened sharply since the credit crunch.

This report will add to the debate about the availability of credit to fund Britain’s economic recovery.

In fact the Bank said that despite the collapse in official borrowing rate, interest rates charged on unsecured loans from Britain’s banks and building societies are far higher than before the financial crisis.

The report shows that the lenders are not passing on the benefits of cheaper money to their customers. On the contrary people borrowing without any security could expect to pay interest at 11%, even though bank rate is currently 0.5%.

The difference between the bank rate and unsecured lending rates has increased dramatically ever since the start of the credit problems driven by the fact that the financial institutions are trying to reduce risk and boost their own profitability.

Before financial markets froze up in August 2007, there was fierce competition among lenders so that the borrowers could get interest rates on an unsecured £10,000 loans that averaged 8%, a spread of 2.5% over bank rate.

According to the Bank of England “During the recent financial crisis, the bank rate was reduced sharply, but in general the interest rates charged on new lending to households did not fall by as much and indeed some interest rates rose.”

The bank further added that interest rates on secured lending, which usually included mortgage borrowing with a property for collateral had witnessed a decrease by around two percentage points to 4%, less than half the five-point drop in the bank rate.

This is definitely bad news for those with unsecured debt. If you find yourself in financial trouble, you can seek debt advice to plan your finances and understand how you could come to an agreement with your creditors to freeze or reduce interest charges and spread your instalments over a longer period of time.

Talk to the debt advisors and you will understand about the different debt solutions such as an IVA (Individual Voluntary Arrangement) and other debt management plans (both formal and informal) that can help you pay off your unsecured loans.