Banks Raise Interest Rates On Loans Despite Base Rate Cuts

It appears that banks are pushing up the cost of personal loans to help boost their profit margins, despite a decision by the Bank of England to cut the base rate on three occasions.

The interest rate on a loan of ?5000 was up on average by 0.71 of a percentage point to 10.16 per cent, whilst the rate on a loan of ?7,500 had risen by almost a full point to 8.88 per cent. This was in direct conflict with a fall of 0.75 of a percentage point in the base rate to 5 per cent.

This increasing gap between the official interest rate and the one millions of struggling consumers in the UK are faced with, has allowed banks to push up their profit margins.

Data shows that despite the Bank of England?s attempts to steady the economy in uncertain times through base rate cuts, they are failing as high street banks effectively set their own interest rate policies, independent of the recommendations from experts on the Bank?s Monetary Policy Committee (MPC).

The reckless lending in the US housing market has left the UK?s financial companies looking at ways to gather in more money from British consumers in an attempt to fund the expected huge losses they could face.

This approach has meant that banks are becoming stricter with who they are prepared to lend money to, with an estimated 1.38 million loan applicants being declined in the first months of 2008.

This policy is expected to leave millions of people in real financial trouble, trying to manage debt repayments and other bills such as mortgages, food costs and rising fuel prices.

The credit crunch has also been seen to be having an effect on the cost and availability of mortgages, credit cards and overdrafts.

A number of mortgage packages have been removed from the market, whilst the cost of a fixed rate deal rose sharply.

Interest rates on credit cards have been increased by banks, with spending limits cut and annual fees introduced. In some cases people have had their cards withdrawn.

Interest rates on overdrafts have also soared despite the cuts in the official base rate.

With the shortage of credit influencing a drop in the property market and a fall in high street sales, city analysts warn that this could send the UK spiralling into a recession.

A study by personal finance analyst website , found that interest rates on some personal loans were becoming far too expensive to manage. They discovered the highest rate on a loan of ?5000 was 29.9 per cent with Citi Financial Loan, with other lenders charging anywhere between 13.4 per cent and 16.9 per cent.

The best rates were found with Your Personal Loan who offered a rate of 6.9 per cent for borrowing ?5000.

Chief executive of , Sean Gardner said, ?The Bank of England has a battle on its hands to restore confidence in the credit markets when lenders react to three rate cuts totalling 0.75 of a point by actually increasing rates. The unsecured loans market is almost mirroring the mortgage market where the issue is not so much rates but availability; whether or not lenders will let you have the cash.?

Leading debt counselling services have reported a sharp rise in the number of seemingly wealthy middle class families in Britain seeking financial assistance.