Brits will find it harder to borrow money as Bank of England issues warning

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BRITS will find it harder to borrow by credit card and personal loan, according to the Bank of England.

The warning comes after lending rates hit their highest level in six years last month.

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Brits could find themselves pushed to take riskier routesCredit: Reuters
The Bank of England has already warned that interest rates could hit 6% next year

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The Bank of England has already warned that interest rates could hit 6% next year

And the cost of borrowing is set to rise further, with the Bank of England (BoE) warning that interest rates could hit 6% next year.

Lenders have reported to the BoE that the availability of credit cards and personal loans to households fell between July and September.

And according to experts, typical household borrowing is set to become even more difficult in the coming months.

This means anyone approved for a new credit card or personal loan is likely to face higher rates.

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As banks tighten lending, the consequences for those not accepted for a new credit card or loan could be extremely damaging.

Some may be forced to borrow money from the unregulated buy-it-now industry, or through riskier and more expensive payday loan companies.

MoneyComms’ Andrew Hagger said: “Credit is likely to become harder to come by as major providers take a more cautious stance, realizing that more consumers will face financial hardship in the near future.

“For those in desperate need of credit, this could see more taking out expensive payday loans or even resorting to loan sharks.”

People’s budgets are under pressure as the cost of living crisis pushes people to borrow more riskily.

Sarah Coles of Hargreaves Lansdown said: “There is a risk that people will borrow in a desperate effort to make ends meet but may struggle to repay the debt, so lenders are raising the bar when it comes to decide who to lend to.”

“That probably means more of them are falling behind on their payments. We’re also likely to see an increase in the type of borrowing they can access – like buy now, pay later.”

But it’s essential to ask yourself if you really need to borrow before committing to a new credit card or personal loan.

If you can’t afford to pay off a debt you currently have, you should avoid incurring any more at all costs.

The news about borrowing affordability comes less than a month after the BoE raised interest rates by half a percentage point to 2.25% for the seventh consecutive time.

The central bank raised the rate to help control runaway inflation which currently stands at 9.9%.

However, the cost of borrowing often increases when the base rate increases, as banks usually pass this on to customers.

This in turn reduces people’s disposable income, which in turn lowers demand, helping to slow any rise in prices – lowering inflation.

But that means people will face higher rates if they need to borrow money.

How will spiraling borrowing costs affect Britons?

If more and more people cannot be accepted for regulated credit cards and personal loans, many may be forced to borrow in riskier avenues.

Some may turn to payday loans, which are usually given to people who are struggling to grow their money until the next payment.

But they usually come with high interest rates. According to Money Helper over a year, the average annual interest rate for a typical payday loan could reach 1,500%.

Others may turn to buy now, pay later (BNPL), which in most cases allows individuals to borrow money without having to undergo a difficult credit search.

BNPL is a type of loan that allows you to make a purchase but delay paying it.

Buyers can spread the cost of their rides over monthly installments – and it’s popular because it’s interest-free.

Companies offering this service include Klarna, Clearpay and Laybuy.

And while BNPL is convenient, it is a form of debt after all.

And if you can’t pay it back on time, you could face steep late fees and marks on your credit report.

If you use BNPL frequently, this could also be a red flag for regulated lenders who may think you don’t have enough funds to make full upfront payments.

Especially now that BNPL purchases are starting to show up on people’s credit reports.

Buy now, pay later is also unregulated, so customers don’t have the same protections afforded to credit card holders.

This includes the buyer protections listed in Section 75 of the Consumer Credit Act.

This protection means that if you pay for a large purchase with your credit card and something happens – like the goods aren’t delivered or the store goes bankrupt – your card provider is just as responsible as the retailer for reimbursing you.

How has the cost of personal loans increased?

According to MoneyFacts, individuals hoping to borrow £3,000 over the next three years are facing an average rate of 15.2%, down from 14.3% at the same time last year.

Those who want to borrow £5,000 over three years face an average rate of 8.5% compared to 6.8% a year earlier.

The average rate on a loan level of £7,500 now stands at 6.1%, down from 4.4% in October 2021.

And the average annual interest rate on the £10,000 loan level stands at 6.1%, down from 4.5% last year.

The figures are averages and take into account a variety of rates available, so you can always borrow at lower or higher rates, depending on your situation.

How have credit card interest rates changed?

The average rate on all types of credit cards, including fees, hit a new high of 29.8%, according to MoneyFacts.

The average annual credit card interest rate has currently fallen from 25% in October 2020 to 26% in October 2021.

Again, the numbers are average and take into account a variety of fares available, so your fare could be even higher or lower.

How can I reduce borrowing costs?

The first thing borrowers can do is try to improve their credit score.

Boost your credit score

Registration in the electoral register is essential to establish a decent credit score.

It proves who you are and where you live, which means it’s easier to get credit if you’re on the list.

It is also wise to check the voters list for any errors. You can register in register to vote.

Don’t over-apply for credit as this can be seen as a sign of financial distress – and every application will be logged in your file.

Use a “soft-search” eligibility calculator to show the likelihood of you being accepted.

Always pay your bills as late payments are also recorded in your file.

Try to reduce your existing debt before applying for new credit, as lenders may be reluctant to lend to you if you already have significant debt.

Lighten your credits

If you took out a loan a few years ago, it might be worth looking for a better deal.

Using a new loan at a lower rate to pay off an old one can sometimes make sense.

But remember that not everyone gets the rates advertised by lenders, as these are reserved for those with good credit.

Check which loans you are most likely to get without hurting your score using an eligibility tool such as Compare The Market or MoneySavingExpert.com.

Blitz your credit card balance

Don’t let credit card debt linger. If you only pay the minimum each month, it could take decades to clear.

Making just the average minimum monthly payment of 2.5% on a £5,000 balance means it would take you almost 38 years to pay off and cost almost £15,000 in total, on a typical interest rate of 22 %.

Upgrade to a balance transfer credit card for an interest-free window of up to 34 months.

Divide the total debt into monthly payments and set up direct debit to ensure you clear the balance during this time. If that’s not possible, try again to switch to a new map.

But not everyone can get the best balance transfer deals because they require a great credit rating.

Find out which cards you’re most likely to get with eligibility checkers at Go compare or Uswitch.

Clear overdraft fees

Tapping into your overdraft can be one of the most expensive ways to borrow, with some banks charging 40% interest, almost double the average credit card rate.

Move to a bank with free overdraft. To pay off larger overdrafts, a money transfer credit card might give you interest-free respite, but beware of high fees.

How can I get debt help?

Sarah Coles of Hargreaves Lansdown said: “If you find yourself in this position, it is essential to get help as soon as possible.

“Talk to a charity like StepChange. They can help you with everything from seeing if there is any state help you can get, to lowering your costs and sorting out debt problems that have accumulated.”

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If you are in debt, there are many services you can take advantage of and they offer free advice on how to manage debt.

Most of them can offer you free advice and help in person, over the phone or online.

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