The Reason Why HP Rates Are So Much Higher Than Base Rate
Monday, 11. October 2010
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One of the constant questions I get asked is if the bank rate is at 0.5% why are personal loans running at around 8% – 10% and HP can be much more than that? Well unless you are a banker or you have a tracker mortgage the bank rate is pretty meaningless and this has always been the case when interest rates have been running at a pretty low level. The fact is that the interest a lender charges is his income. He might have a few fees that bolster up his admin costs but he still has his overhead costs to meet such as buildings, staff, computer etc. These costs don’t reduce simply because the interest rate drops. He has to recover all of his costs out of the interest rates charged. At the same time all lenders have reduced their overheads, as it is still competitive in the market, so if they can find a way of reducing the interest they charge, by even half of one percent, they may just get the edge so they don’t try to rip you off (well not all of them). The other complication is the level of arrears and bad debt. Of course if money that is due to them doesn’t arrive they have to make allowances and incur costs in order to recover the money, pushing up the overheads and ultimately the interest charges. So for those that believe that the interest rates are a rip off, when compared with bank base rate, they are not making the correct comparisons. In this semi post recession market you should forget comparisons with base rate and compare rates between providers but don’t get caught out by simply applying for the lowest rate then find you have signed into some nightmare contractual terms and conditions. Have you had any bad experiences when it comes to interest charges? By Graham Hill
