Beware rising interest rates when borrowing
THE cost of borrowing is rising, largely because the Bank of England have raised their base rate. And with further rate rises expected next year, we’re likely to see a large increase in the numbers of borrowers who can’t make their repayments on time.
The increase in rates is affecting mortgages as well as personal loans, resulting in increasing monthly payments for already hard-pressed borrowers who are watching prices rising faster than their wages.
As well as the cost of borrowing increasing, it looks as though the number of people borrowing is on the rise as well, particularly those taking loans on an unsecured basis. And this is worrying regulators.
Their concern is that borrowers comfortable with low rates of interest will start to default on agreements as rates start to rise.
This is a particular problem with unsecured lending, where lenders have no guarantee that they will get their money back if the borrower runs out of money.
The most common examples of unsecured lending are credit cards, store cards and personal loans.
Because unsecured loans tend to carry a higher risk for lenders, interest rates tend to be that bit higher. And we have a bit of a vicious circle where those who can least afford to repay their loans end up paying a higher interest rate, making it more likely that they won’t be able to make the repayments on time.
But the alternative, to borrow money and secure it on an asset like your home, can also be fraught with danger.
If you secure a loan on your property and then default on it, you run the risk of losing your house because the lender can repossess if the default is serious enough.
So you have to be really sure that you will be able to maintain the regular payments if you borrow money against your house.
You might be tempted by lower interest rates but you need to be careful since lower interest rates will usually be offset against a longer-term loan.