Cost of unsecured loans rises, Bank of England says

Cost of unsecured loans rises

The interest rates on unsecured loans from banks are significantly higher now than the period prior to the economic downturn, despite the drop in official borrowing expenditure, according to a bulletin released today by the Bank of England.

The bank reports that people getting unsecured loans now would pay up to 11% interest, event though the interest rate of banks is currently pegged at 0.5%.

Also, the bulletin says that the difference between bank rates and unsecured lending rates had expanded markedly since the financial meltdown as banks and other financial entities wanted to minimize risk and focus on profits.

“During the recent financial crisis, the bank rate was reduced sharply, but in general the interest rates charged on new lending to households did not fall by as much and indeed some interest rates rose,” the report said.

The bank also said that the rates for secured loans had slid two percentage points to 4% which is less than half the decline of five points in the bank rate.

This bulletin underscores the ongoing debate over credit accessibility in Britain to drive an economic recovery. The last Labour administration put up targets for nationalised banks to offer credit to homeowners and businesses, while business secretary Vince Cable has called out lenders for almost emptying the credit pipeline.

The Bank of England said that the growing gap between the rates of unsecured loans and set bank rates could make loans costlier which will in turn decrease demand. However, bigger retained profits for lending firms would allow them to offer more capital.

Posted by James Fried on Monday September 27 2010, 9:06 AM EST. All trademarks acknowledged. Filed under Featured News, Finance. Comments and Trackbacks closed. Follow responses: RSS 2.0