Loan costs & the base rate
When the Bank of England's base rate comes down, why don't loan costs come down at the same rate? The simple answer is: the loan markets aren't ruled by the base rate.
Loan markets and the cost of funding
The Bank of England is a source of funding for lenders - but it's not the only source. They also borrow from each other, from other kinds of financial institutions and from depositors (people who are saving with them). Every time they set the price on a certain kind of loan, they need to think about their own funding costs, which will depend on how much their lenders are charging to loan them money.
Loan markets - a question of risk
Lenders will charge more for a loan which they consider to be risky. That's true of the companies that provide consumer loans and it's true of the companies which lend them money. At a time like this, this is a particularly important issue: one important feature of the credit crunch is that companies are finding it hard to trust in each other's stability.
After all, quite a few big financial names have collapsed since the economic problems started, so financial institutions are very careful about lending to any company which might follow suit. Unfortunately, it's very hard for them to see how healthy a lender's finances are right now, as this depends on how well each one of their borrowers repays the loan / mortgage they've taken out.
In other words, even healthy loan providers are seeing creditors charging them more to cover the risk (whether or not it's a real risk) they're taking by lending to them. So loan providers have to 'pass on' at least some of that extra cost to their customers - not just other loan providers, but consumers who come to them for a loan.
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Tags: loans, base rate, loan, loan rates, loan companies