Inflation in the UK has been soaring. Though there was a slight fall in the rate of inflation in August, many economists expect inflation to remain high for some time. The ongoing changes happening within the economy mean predictions of when figures will peak are volatile.
The Channel Islands has also been impacted and, while not to the same extent, the rate of price increases in Jersey and Guernsey are the highest that they’ve been for the past 30 years.
To bring inflation under control and stop prices rising so quickly, the UK’s central bank, the Bank of England, has continually increased interest rates.
The Base Rate is currently 3% but, continual rises over the coming months are widely predicted. Again, much like inflation, how high these figures could reach is unknown in the current climate.
However, what we do know is higher interest rates increase the cost of borrowing, reduce disposable income, encourage saving and limit the growth in consumer spending. This, in turn, lowers economic growth and lowers inflation rates.
So, what happens if you need a loan?
The bottom line is that as interest rates increase, the cost of borrowing increases. Monthly loan repayments will therefore be higher and unless the interest rate on the loan is fixed, you will pay more interest over the remaining term of your loan. For those planning on taking out a loan, higher interest rates may also impact the total amount you can borrow as the increased cost of servicing debt may impact affordability.
This doesn’t mean you can’t – or shouldn’t – take out a loan. However, it’s vital that you use your own judgement. It’s worth considering how external factors might affect your borrowing. Even if a loan is offered to you, it’s important that you understand your own financial situation and are confident that you can afford the repayments.
What if I’m struggling to make repayments?
If you choose to take out a loan but find yourself struggling later down the line, it’s vital that you contact your lender as soon as possible. Don’t bury your head in the sand. Talking the circumstances through with your lender may help to find a way forward.
If you are really struggling, there are numerous free debt advice providers that will be able to give you unbiased and informed advice. Most of these services can be found online.
If interest rates rise, the cost of borrowing will increase. This doesn’t mean you shouldn’t take out a loan, but you should carefully consider how your financial position might change and choose your lender wisely. If you are considering taking out a loan but want to better understand how economic changes could affect this decision, please talk to a member of our team today.