Households could see a sharp increase in the cost of servicing their debt following the recent rise in interest rates – and that’s on top of skyrocketing mortgage bills.
Thirteen consecutive base rate hikes by the Bank of England since November 2021 have pushed up the cost of personal finance deals across the board.
From credit card bills to personal loan rates, car loans to monthly insurance contracts, the increases may seem relatively small, but over the course of a year they quickly add up.
The impact of the last increase in the base rate by 0.5 percentage point to 5 percent last week is already seeping through.
Here, Money Mail examines how your unsecured debt costs have been impacted by base rate increases.
Cost crisis: The impact of the Bank of England’s latest 0.5 percentage point hike to 5% last week is already trickling into households’ accounts
Credit cards
The cost of borrowing with credit cards is already starting to rise after last week’s base rate hike.
Credit card rates are variable, so providers may decide to increase the rate on existing cards.
Andrew Hagger, founder of personal finance website Moneycomms.co.uk, says: ‘Credit card providers such as MBNA, Halifax, Lloyds and Barclaycard all tie customer interest rates to the Bank of England’s base rate.’
The average credit card debt per household is £2,315, according to figures from the Money Charity.
That means an interest rate rise in line with the base interest rate hike of 0.5 percentage point over the course of a year would add an average of another £11.58 to the cost of borrowing.
Hagger adds: “Many will have already received letters saying that increases in their monthly costs are coming. However, it may take several weeks for the rate increases to come through.’
Credit card providers are required to give you 30 days’ notice before increasing interest on your card.
Customers who take out a new card also notice that the rates offered are increasing, thanks to the increases in the base rates. According to Defaqto, the average rate has increased from 25.39 percent to 30.6 percent in just one year.
Barclaycard, for example, has increased its annual percentage rate (APR) from 21.9 percent to 24.9 percent since the base rate began to rise from a record low of 0.1 percent in November 2021.
Virgin Money, HSBC, NatWest and Sainsbury’s Bank have raised rates from 21.9 percent to 23.9 percent, according to Moneycomms.
Card accounts: the average rate when borrowing with credit cards has increased from 25.39% to 30.6% in just one year
That means a Barclaycard customer with the average UK credit card debt would pay an extra £69 a year compared to November 2021. A Virgin Money customer would pay an extra £46.30 a year.
If you have outstanding credit card debt, it may be worth checking that you’re not paying more than you need to.
Katie Brain, consumer banking expert at Defaqto, says: “Currently, there is still a good choice of 0 percent balance transfer credit card offerings.
For example, Virgin Money offers 31 months with a 3.50 percent fee, or Natwest with 19 months with no fee.”
Personal loans
Households looking for a new personal loan will find rates almost double what they were in November 2021 before the first base rate hike. The higher the base rate rises, the further personal loan rates are likely to rise.
The average personal loan balance is £5,244. A borrower taking out a loan of this size over three years through Post Office Money in November 2021 would have received a rate of 3.4 percent.
Current rates have now risen to 6.7 per cent, forcing new customers to pay an extra £267 over three years for the same debt.
M&S Bank’s rate increased from 3.9 per cent to 7.5 per cent over the same period, forcing customers to pay an additional £291 over three years.
Some rates have increased in June alone. A customer who takes out a loan with post office money after last week’s base rate increase will pay 6.7 percent – 0.4 percentage points more than on June 1.
Higher repayments: Personal loan rates have almost doubled from November 2021 before the first base rate hike
This would cost an additional £32.39 in interest over the course of three years on a typical loan size.
M&S Bank’s new loan rates rose by one percentage point in June to 7.5 per cent, costing customers an additional £80.96 for a loan of £5,244 over three years.
In general, the larger the personal loan you take out, the lower the rate that you are offered. That means smaller size loans are even more expensive.
For example, some Sainsbury’s Bank loans with a term of 36 months have risen from 3.30 per cent. to 6.20 percent.
AA has raised rates from 3.30 percent to 6.7 percent, while Tesco Bank and Novouna have raised rates from 3.4 percent to 6.7 percent.
Personal loan rates are set at the beginning of your financing agreement, protecting existing borrowers from later rate increases.
Car financing
The cost of auto financing is also creeping up, especially for used cars.
More than eight in 10 cars are purchased through a financing arrangement called a personal contract purchase (PCP).
These come with a fixed interest rate so drivers with existing deals don’t see their costs increase.
However, new customers will see the impact of base rate increases.
Used car PCP rates have increased from about 5 percent in November 2021 to about 11 percent since the last base rate increase.
On a typical loan, a driver taking out a four-year contract would have paid a monthly charge of £770 before interest rates rise.
But 13 rate hikes later, the cost of the same deal would now be £180 more expensive at £950 a month.
Car loans: Personal Contract Used car purchase rates increased from around 5% in November 2021 to around 11%
Phil Johnston, founder of Spencer Flint Automotive, says: ‘Used car PCP rates are not likely to rise much higher as drivers will simply back off the deal.
“Instead, I expect dealers to cushion any further increases in base rates by keeping PCP rates the same and charging less commission.”
Financing costs for new PCP car finance are heavily subsidized by dealers to incentivize customers to purchase the latest model, and there are even a number of 0 percent deals on the market for some of the most expensive models.
Mr. Johnston added, “It’s difficult to keep track of the true cost of new car PCP financing because the rates are heavily subsidized.” Stuart Masson, founder of the website The Car Expert, says more and more motorists are buying cheaper models to keep costs down.
“To reduce their costs, drivers are trading into budget brands such as Dacia and MG that they had not considered in the past, while mid-range brands such as Ford, Vauxhall and Renault are under pressure,” he says.
Overdrafts
Overdrafts are already so eye-watering that it is unlikely they can rise much further. The rates are variable, so in theory banks can pass rate increases on to their customers at any time.
However, banks may choose not to because they are already under pressure from MPs and customers.
High Street banks are under fire for not passing on base rate hikes to savers. In this climate, an increase in overdraft rates above 35 percent would be the deciding factor.
MoneyComms’ Andrew Hagger says: “While there is no official cap on allowed overdraft rates, I’m sure customers and MPs would be outraged if banks decided to raise rates by more than 40 per cent at a time when customers are struggling so much to get around to come. Meet.’
Insurance
Most insurers give you the option of paying the full annual cost of your premium up front, or paying it in monthly installments.
If you opt for the latter, you actually conclude a credit agreement for the entire balance, on which you pay interest.
Policyholders spend around £200 more when paying monthly than when paying annually, according to an analysis by comparison website MoneySuperMarket.
Customers with existing deals will not see their prices increase because payments are fixed. However, you need to be careful when you come to take out a new premium – if you choose to pay monthly, make sure you know what it will cost and are happy to pay it.
A spokesperson for Money SuperMarket says: ‘Insurance paid monthly is at fixed rates, so you won’t see a change in your monthly payments in response to an increase in the base rate.
“However, if you take out a new policy after a base rate increase, the APR may be higher.”
With insurance premiums rising, prepaying is one way to reduce costs.
Kara Gammell, financial expert at MoneySuperMarket says: ‘In these uncertain financial times it is always cheaper to buy your insurance annually.
‘Monthly payment options have an APR percentage, which makes it more expensive – it depends on your situation and premium price though.
‘Even for a higher amount, this may be the best option for you.’
moneymail@dailymail.co.uk
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