The reason why loan rates are so high
The Bank of England base rate is at its lowest ever level so why are loan rates so high?
The Credit Crunch owes its origins to the US but more particularly to mortgage bad debt. Bad debt put simply, is money which is owed to banks which it is unlikely to recover. Over the last year you will have no doubt heard on the news that so-and-so bank has written-off another ‘x’ £billions of bad debt. Bad debt written-off is when the bank accepts that it will never get that money back.
Sadly the recession is affecting our lives in many ways such as a drop in consumer spending, house prices falling and unemployment rising. Any rise in unemployment means that for all types of loans, not just mortgages, more and more people will find themselves struggling to repay them. This creates bad debt for the banks.
Even in the good times, all banks expect that a small percentage of loans will become bad debt. However, knowing that the levels of bad debt will rise (on the back of rising unemployment) the banks have put up their APRs across all loans (both unsecured & secured) in order to build up contingency funds to cover those anticipated bad-debt losses.
So even though the Bank of England’s base rate is only 0.5%, APRs for even the lowest rate unsecured loans now start from around 8%. As and when we start to come out of recession, consumer confidence will start to return and spending will increase. Then unemployment will start to fall and with it, banks expectations of bad debt levels will reduce. This is the point at which we should start to see loan APRs dropping although the eventual sting in the tail will be that the Base Rate will start to rise!
