Interest rates and inflation affect loan rates in a number of ways. Loans are relative to national financial trends that define how much people can expect to pay back in terms of interest, as well as how much they can expect to save in terms of investments. By understanding current trends for inflation and interest rates, and how they affect different types of secured and unsecured loans, it is possible to make a more informed decision about whether or not a loan is worth taking out.
Inflation and Interest
Inflation generally refers to the average rise in consumer products over the course of a year. This is measured in relation to consumer spending, and via Consumer and Retail Price Indexes. If prices for goods rise, then the value of currency spent on them will fall, creating a scenario where consumers are less likely to pay out towards the overall economy. Inflation rates fluctuate throughout the year, and are often affected by rises in fuel and food prices. The Government and the Bank of England aim to track inflation, and make changes via a Monetary Policy Committee to curb inflation and encourage spending and investment.
Interest rates are set by the Bank of England’s Monetary Policy Committee, and are designed to provide a framework for the general amount of interest that is charged on loans, and how much consumers can expect to make from their savings. Commercial banks are expected to adjust their rates in response to interest rates. Low interest rates are likely to lead to more borrowing and spending, but with the effect of lowering the value of savings.
Inflation can be reduced by more consumer spending bringing down the value of goods. By contrast, higher interest rates mean that more people are likely to consolidate savings, and take out less loans. The current base rate of interest in the UK is 0.5%, which is intended to stimulate the depressed UK economy by encouraging spending and loans.
Low interest rates have an effect on how much people can expect to pay back on their loans. Mortgage borrowers are particularly affected if they take on tracker loans that are relative to the base rate of inflation, and can decrease the amount of interest paid over time. Mortgage loans that are on a fixed rate of interest, by contrast, are more stable but can be at a disadvantage in terms of not being able to take advantage of lower rates. Banks and lenders also offer standard variable rates that can rise above the base rate. Loans can also be affected by a bank’s willingness to offer lower rates, but with the borrower paying a higher deposit.
Inflation and interest rates similarly affect how much lenders are willing to charge for personal and unsecured loans. Standard variable rates can be set higher for unsecured and secured loans against property, while short term payday loans tend to retain very high interest rates. In this context, while a low base rate elsewhere is likely to encourage a greater flexibility over offering loans to stimulate investment, secure mortgage loans tend to be more vulnerable to a base rate change.
This is a guest post article published on behalf of GBP Finance. Visits GBP Secured Loans today for a 1 minute Fast Track no obligation secured loan application!