Loans: how the base rate affects availability
Anyone looking for a loan may have been pleased to see the raft of base rate cuts announced since October, hoping they'll help reduce the cost - and increase the availability - of loans. But how likely is that?
Loan availability
Like mortgages, loans are financed in a number of ways. The Bank of England is only one source of funding for lenders, who also depend on other sources, such as other lenders - and savers' deposits.
Saving, however, is not exactly being encouraged at the moment. A falling base rate might be popular among people looking for loans and mortgages, but people with savings are watching their interest payments go down every time the base rate falls and banks and building societies reduce the interest rates on their savings accounts accordingly.
Clearly, this may lead some savers to reduce the amount they're saving - or even withdraw their savings altogether and invest the money in other things. The more that happens, the less money will be available for lenders to hand out in the form of mortgages, loans and other forms of credit.
Loan cost
Since the Bank of England isn't the only source of funding for loan providers, the base rate doesn't entirely dictate the cost of loans.
If bank A borrows from bank B, what really counts is the LIBOR (London Interbank Offer Rate) rate. This is the rate at which banks offer to lend money to each other, and it has been significantly higher than the base rate for some time now. Of course, bank A needs to make a profit from lending money on to consumers, so it will need to charge more than LIBOR when it provides loans.
More about the issues affecting the cost of secured loans: click here.
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