Will Debt get More Expensive After the Pandemic Ends?

Interest rates can have an impact on several areas concerning to your finances. These include mortgages, borrowing, pensions, and savings. The Bank of England sets the bank rate also known as ‘base rate’ for the UK, which is currently 0.1%. It, in turn, can influence the cost of borrowing or the rate of interest charged when financial institutions, such as banks, lend money.
It is no surprise that credit card interest rates have hit a record high this month despite a record low base rate. Providers have hiked the cost of borrowing for those people with poor credit histories or turned down by mainstream banks. The average credit card purchase APR now stands at 25.5%, up from 24.1% last June, after the credit card provider NewDay upped interest rates on its Aqua and Fluid cards. While interest rates on mainstream credit cards haven’t changed drastically, providers could increase rates. It is because they expect rising defaults on the back of millions of more people becoming unemployed or suffering a hit to their incomes.

Want to use credit cards for essential expenses?

The people who are turning to credit cards to fund essential spending over the next few months are likely to find that the cost on their statement each month will go up. The hike in APRs on sub-prime cards is targeted at those people who do not pass credit checks elsewhere and cannot get mainstream cards from the larger banks. It may also prove to be an issue for cash-strapped households if they find themselves resorting to them more often. As the recession begins to bite and unemployment soars, card companies will feel the brunt and increase pricing to help protect their margins. The move will inevitably put a dampener on demand for credit. Banks have already started to reduce the number of applications they receive from new customers by consistently reducing the availability and length of interest-free balance, transfer, and purchase deals. Banks are also constricting interest-free offers as they focus more on existing customers taking 3-month payment holidays, which are due to come to an end next month.

What does the future hold for personal loans?

With the economic uncertainty brought on by the pandemic, many consumers have been considering consolidating their debt to get a hold of their finances. It has been found that not only is it becoming more expensive for consumers to take out personal loans, but many are finding that their loan applications are being declined.  

Personal loans rates

It is now cheaper to borrow money than ever before because The Bank of England has cut interest rates to 0.10%. However, the average rate on personal loans of £5,000 over 3 years has increased from 7.1% in January 2020 to 7.4% in June. Personal loans to a value of £7,500 payable over 5 years have decreased by 0.1%, from 4.6% in January to 4.5% in June. Meanwhile, personal loans at £10,000 payable over 5 years have remained at 4.5%. If borrowers are thinking about applying for an unsecured personal loan, then they may wish to check deals now, as it is getting more expensive to consolidate debts by the day. Consumers applying for a loan can expect a better deal. On the contrary, they could pay significantly higher rates depending on their situation. For consumers in full-time employment and with a good credit score, the best rate available on a £7,500 loan payable over 5 years is as low as 2.8%. For those looking to get a loan of £5,000 payable over 3 years, the best possible rate available is 3.4%.

Consumers struggling to get a personal loan

One way to efficiently manage money in the present scenario, could be to apply for a personal loan to consolidate the debts. However, many consumers are finding that they are struggling to get their loan applications approved. As the economy floats on uncertainty, lenders are reluctant to take on risky lending. It means that consumers who have been furloughed will struggle to have a personal loan application accepted. Moreover, those with a bad credit score will also struggle to find a lender. Either way, applicants could choose to do a soft credit check before making a personal loan application to know their situation. Many lenders are facing the same issues as other businesses with staff shielding or furloughing. It means that it has been harder for these lenders to process applications as quickly as they normally would. It has led to delays in a usual smooth process, and all lenders have reduced their risk appetite due to the uncertainty surrounding people’s employment. The result is that most will have to choose a higher rate loan option if one is available at all.

Pandemic has hit households in financial crisis the hardest

Around 4.6 million households have been adversely affected by the pandemic situation and have built up £6.1 billion of arrears and debt. Moreover, 4.2 million people have had to borrow to make ends meet. Most people are using credit cards which happen to be the most common form of borrowing. It is followed by using an overdraft, and a high-cost credit product.

Should you fix your mortgage rate right now?

Mortgage rates are at an all-time low. Hence, this is the time to fix your mortgage rate. Historically, the best fixed-rate mortgage deals disappear as soon as there is any sign the Bank of England may raise its interest rates. Now, there is no way to know as to how long the interest rate will remain at 0.1%. Hence, it is prudent to speak to a mortgage advisor as soon as possible. The mortgage expert will check and see if you are in a situation to a mortgage for free, and with no obligation. The advisor will also be able to tell you precisely, how much you can expect to save. In general, a free mortgage check saves up to £80 per £100,000 of mortgage per month. If you are dealing with a financial crisis during the pandemic, then contact us today to discuss your situation.

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