Consumer expert Martyn James offers advice for people with overdrafts, loans and credit cards amid rising UK interest rates
It’s hard to know what impact all of this will have on you personally, especially if you have loans, mortgages, or credit. Mortgage rates are too volatile at the moment to predict. The best advice if you don’t have a new confirmed interest rate is to sit back and wait to see what happens when things stabilize. Speak to a professional broker who can walk you through all the options and explain what the future may hold for you.
But with other forms of loans and credit, here’s my advice…
Overdrafts, borrowings and credits
Many people have become permanently stuck in their overdrafts over the years. Being an ‘overdraft prisoner’ can be a costly business, as many banks now charge you complicated fees for using your overnight agreed overdraft.
This means the longer you’re in an agreed overdraft, the more you’ll pay – and that’s even before you go over the limit. So being stuck in overdraft is actually one of the most expensive ways to “borrow” money.
Banks are obliged to help you if you say they are in financial difficulty and the regulator has given them detailed instructions on how to do so. It is possible that they will turn your overdraft into a low-interest or even interest-free loan in exchange for your giving up the overdraft. You can then repay the money at a rate you can afford.
Loans and credit agreements
A traditional loan or credit contract should not fluctuate due to the current chaos in the financial markets. However, it will become more expensive to borrow money. You can expect to see new lending rates and credit prices go up. Borrowers should beware, however.
Do you remember payday loans? The industry collapsed after (justified) negative publicity about often appalling lending standards and outrageous interest. Although most companies have gone out of business, the industry has slowly slipped under the radar, offering loans ranging from three months to a few years, instead of the single month associated with payday loans.
Be careful though because interest rates are still very, very high. October is traditionally a month when people start borrowing to pay for Christmas. Do not use high-interest or short-term loans or any other form of borrowing to do this. Focus on lowering your bills and avoid buying now, paying later on your purchases, which only moves debt further down the line.
Credit card interest rates may fluctuate throughout the agreement, so keep in mind that the Bank of England’s interest rate hike is likely to impact any money you you owe or borrow from the card in the future.
There are options here for people who are worried about not being able to pay the debt with a higher interest rate. Under consumer credit law, lenders must give you 30 days notice before the price increase occurs. You then have 60 days to “reject” the rate if you are not satisfied.
When this happens, your card is closed and the money becomes refundable. However, this triggers a process where the card provider must allow you to refund the money within a ‘reasonable’ time and at a rate you can afford. So have the details of your finances handy so you can explain what is affordable to you in real terms.
Some lenders don’t offer the best repayment rates, so if you still can’t pay the debt, file a complaint and take the matter to the free financial ombudsman. You may also be able to transfer the debt to a credit card without interest, but this will incur fees and you will need to be disciplined to pay them off.
Martyn James is a leading consumer rights campaigner, television and radio host and journalist.