Personal Loans Are ‘Decoupled From Base Rate’

The cost of personal loans and credit card borrowing has become decoupled from the Bank of England base rate as loan interest charges have remained high despite the historically low base rates.

The cost of borrowing money remains high even though the base rate has remained at 0.5% for the last seventeen months, according to the Bank of England’s latest report on trends in lending.

This means that “the cost of borrowing on a credit card has remained entirely decoupled from the Bank of England base rate, meaning the margins that credit card companies are making have increased significantly over the last couple of years. This also means many consumers will have seen little or no benefit from the low base rate.”, says Louisa Parker, Head of Research and Policy at the Money Advice Trust.

The Bank of England justifies the higher borrowing costs on the heightened risks of lending after the credit crunch and points to the increases in personal insolvencies as evidence that consumers are still struggling to meet loan interest payments.

The Money Advice Trust, however, is concerned about the impact of the discrepancy between loan charges and the base rate and wants to “encourage lenders to place greater significance on the Bank of England base rate when pricing their products.”