How are higher interest rates affecting people with debt?
By Mr Bankruptcy
15th May 2024
We waited with bated breath for May’s announcement by the Monetary Policy Committee on the Bank of England’s base rate. Would the committee decide that inflation was coming under control and reduce the rate from its recent high of 5.25%?
Unfortunately, for anyone hoping that a lower level would ease the pressure on mortgage owners and get the economy moving again, the base rate will stay at 5.25% until at least the next time the committee meets, in late June.
So, what will this news mean for anyone facing a large debt and what can they do about it?
How do higher interest rates affect you?
The Bank of England’s base rate influences the interest rates charged by every other lender. We got used to the run of historically low high street interest rates that followed on from the financial crisis in 2008, with rates staying under 1%. It was tempting to make the most of the cheap loans on offer to get a mortgage, injection cash into a business or to treat yourself to a new car or a holiday.
Then, a number of factors, including post-lockdown debt, the cost-of-living crisis and higher energy prices, led to rising inflation. The Bank of England response was to increase lending rates in an attempt to cool down the economy and bring inflation back towards the government’s 2% target.
This wasn’t great news for everyone but was especially difficult for anyone who had taken out a large loan and were finding that their monthly interest repayments were becoming unaffordable. And for those with a secured loan, not being able to keep up repayments could mean a creditor could seize whatever asset they had used to secure the loan against, even if it was your family home.
On top of that, for anyone looking for a loan, the current climate is making it difficult to find an affordable one as lenders seek to reduce their risk by cutting the amount they are willing to lend to an individual. A higher monthly repayment could mean a lower approved amount since lenders qualify you based on how much total debt you have compared to your income (a measure called your debt-to-income ratio). So higher interest rates may be good for savers but it’s bad new all round for borrowers.
What you can do about unmanageable interest repayments
Interest rates won’t stay at this level for ever, but they may never return to their record lows. In the meantime, there are a number of actions you can take.
- Make sure you know how much interest you are paying on your loan. An accurate and realistic picture of your situation will help you see your way out of a debt problem.
- Try explaining your situation to your creditor and negotiating a better interest rate. Although you are legally obliged to pay the interest rate they set, they may be willing to be flexible if you risk defaulting on the loan.
- Pay more than the minimum monthly payment on your credit card when you can; it will save you money to reduce the amount you owe.
- Investigate the possibility of a consolidation loan for paying off all your debts in one. This can work out cheaper.
- Look for a card with a lower rate and transfer your current credit card balance to it (but watch out for transfer fees).
- However, beware of predatory lenders who entice you with an easy-to-get loan which has a very high monthly interest rate.
Be prepared to act quickly once interest rates fall and see if you can take advantage of the market. But if you aren’t sure of your best way forward, you can go to a debt advisor who can help you to analyse the scale of your debt problem and explore solutions that work for your individual circumstances.
And talking to someone about your debt problems will often help, if only to relieve you of some of the stress that comes with it..
James Rosa Associates
James Rosa associates is a firm of debt advisors and debt adjustors. We understand the anxiety and feeling of helplessness that can come when you face unmanageable debt.
With a supportive and friendly approach, we offer a full range of advice and professional services to business owners/directors as well as individuals who need advice and support about debt, or who are involved in civil or commercial disputes.
As well as debt advice, our services include:
We are authorised and regulated by the Financial Conduct Authority (FRN665061) to work with clients to produce bespoke solutions to fit their specific circumstances.
Find out if you qualify for a free consultation
If you want to deal with an unmanageable debt, or bring a dispute to a swift and cost-effective resolution, contact James Rosa Associates, ring 0845 6807217 or email enquiries@jamesrosa.co.uk to find out whether you qualify for a free consultation.
Please be advised that all views expressed in these posts are those of the author and not of James Rosa Associates ltd.