It’s been one of the most chaotic weeks for people’s finances that I’ve ever encountered.
From the impact of the mini-budget and the plummeting pound to the Bank of England raising the base interest rate to 2.25% - each day seems to bring more worrying news.
Knowing how all of this will impact on you personally is hard to figure out – particularly 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 interest rate confirmed is to hold fire and wait to see what happens when things stabilise. Speak to a professional broker who can talk you through all the options and address what the future might hold.
But with other forms of lending and credit, here’s my advice...
Overdrafts, loans and credit
Lots of people have become permanently stuck in their overdrafts over the years. Being an ‘overdraft prisoner’ can be an expensive business because many banks now charge you complicated fees for using your agreed overdraft by the day.
This means the longer you are in an agreed overdraft, the more you will pay – and that’s even before you go over the limit. So being stuck in the 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 difficulties and the regulator has given them wide-ranging instructions on how to do this. It’s possible they could turn your overdraft into a low or even no-interest loan in return for you abandoning the overdraft. You can then pay back the money at a rate you can afford.
Loans and credit agreements
A traditional loan or credit agreement should not fluctuate as a result of the current chaos in the financial markets. However, it is going to become more expensive to borrow money. You can expect to see new loan rates and credit prices increase. Borrowers need to be wary though.
Remember payday loans? The industry collapsed after (justified) negative publicity about the often-appalling standards of lending and outrageous interest. Though most firms went out of business, the industry has slowly crept back under the radar, offering loans that run from three months to a few years, instead of the single month associated with payday loans.
Watch out though as interest rates are still very, very high. October is traditionally a month when people start to borrow to pay for Christmas. Don’t use high-interest, short-term lending or any other form of borrowing to do this. Focus on cutting your bills and avoid buy now, pay later deals when shopping which just move the debt further down the line.
Credit card interest rates can fluctuate throughout the agreement, so bear in mind that the Bank of England interest rate hike is likely to have an impact on any money you owe or borrow on the card in future.
There are options here for people who are worried they won’t be able to pay the debt with a higher interest rate. Under the Consumer Credit Act, lenders must give you 30 days’ notice before the price increase occurs. You then have 60 days to ‘reject’ the rate if you are unhappy.
When this happens your card is closed and the money becomes repayable. However, this triggers a process where the card provider must allow you to pay back the money in a ‘reasonable’ amount of time and at a rate you can afford. So have the details of your finances handy so you can explain what is affordable for you in real terms.
Some lenders don’t offer the best repayment rates, so if you still can’t afford the debt, make a complaint and take the matter to the free Financial Ombudsman. You might also be able to switch the debt to an interest-free credit card – but this will incur a fee and you must be disciplined about paying it off.
Martyn James is a leading consumer rights campaigner, TV and radio broadcaster and journalist.