Euro crisis could make loans more expensive

Ed Bowsher
by Lovemoney Staff Ed Bowsher on 22 November 2011  |  Comments 7 comments

If you're thinking about taking out a personal loan, you should get cracking. The euro crisis means that loan rates look set to rise.

Euro crisis could make loans more expensive

Rates for personal loans have fallen a lot over the last year and the current market-leading loan comes with a cracking 6.1% rate. However, such low rates probably won’t last for long. I believe that the horrendous euro crisis could make personal loans more expensive and also make them harder to get. 

Libor 

It’s all down to something called Libor (the London Interbank Offered Rate.) This is the rate at which banks are prepared to lend to each other. 

In normal times, you’d expect Libor to be just a little bit higher than the Bank of England’s base rate. So back in January 2005 – long before the financial crisis – the main Libor rate was 4.89% while the base rate was 4.75%. The difference between the two rates was just 0.14%. 

However, if banks are worried that other banks might go bust, they start to charge higher rates for any loans they make to other banks. And when you look at the current Libor rate, it’s clear that at least some banks are getting worried. 

The current Libor rate is 1.01% which is 0.51% higher than the Bank of England’s base rate. Admittedly, the differential was much bigger back in October 2008, but it’s clear that Libor is on the up and above its long-term average. Look at this table: 

3-month Libor rate compared to Bank of England base rate 

Date

3-month Libor rate (Sterling) %

Bank of England base rate %

Difference between Libor and base rate %

14 November 2011

1.01

0.5

0.51

14 July 2011

0.83

0.5

0.33

15 March 2010

0.65

0.5

0.15

15 June 2009

1.25

0.5

0.75

1 October 2008

6.31

5

1.31

2 January 2005

4.89

4.75

0.14

3-month Libor rate measures how much it costs for banks to borrow in sterling for three months. There are other Libor rates for different durations and currencies. 

Libor has risen because the euro crisis has revived worries that some European banks might go under. Some commercial banks have lent substantial amounts to Greece, Italy and other troubled economies, and if, say, Italy defaults on its debts, some banks could be in very serious trouble indeed. 

If Libor continues to rise, some banks will have less money to lend to businesses and individuals and will become more picky about who they lend to. They’re also likely to raise the rates they charge. Some mortgages could become more expensive too. 

So if you’re thinking about getting a personal loan, I’d recommend that you don’t hang around. Most personal loans have fixed rates, so if you took out a loan now at 6.1%, you could lock in that rate and it wouldn’t matter if rates for new borrowers rose next year. 

Best rates 

You can get that 6.1% rate from Nationwide Building Society. However, that rate is only on offer to people who already have a Nationwide current account or who open a current account now. You’ll also need to borrow between £7,500 and £15,000. 

If you don’t have a current account with Nationwide, you could still get a cracking loan from the building society at 6.2%. You could also borrow at 6.2% if you took out a Sainsbury’s Finance Shopper Loan. Once again, you’ll have to borrow between £7,500 and £15,000 and you’ll also need to have a Nectar card. This rate is a special offer that ends on November 21st. 

The third really attractive loan is the Alliance & Leicester Aggregator Personal Loan which is available at 6.3%. 

It’s worth stressing that not all applicants will get these loans. Lenders only want to offer personal loans to people with good credit ratings. What’s more, some successful applicants probably won’t be offered the best rates. Lenders are only obliged to offer their best rates to 51% of successful applicants. 

But the crucial point is that we expect lenders to get even more picky if Libor rises further as we expect. So it makes sense to get cracking and apply now. And even if you think I’m talking rubbish about Libor, it still makes sense to apply now as Sainsbury’s will withdraw their 6.2% offer next week. So don’t hang around! 

More:  Top loans for November |  Why being an 'average' borrower will cost you

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Comments (7)

  • electricblue
    Love rating 769
    electricblue said

    Come on Ed, you're the man to do a little more research and give us the figures - which of our major banks have vulnerability to these Euro zone inter-bank loans and for how much? We have been told that most UK banks don't have substantial liabilities in the most troubled Euro countries so what is the full story?

    Report on 20 November 2011  |  Love thisLove  0 loves
  • vulcanite
    Love rating 39
    vulcanite said

    @Electricblue

    Go to the European Banking Authority website, and look for the 'disclosure' template link, it is on a PDF file.

    Depending on who you bank with, it may make uncomfortable reading, so have a stiff drink to hand; shows what greed, and a callous disregard for risk might achieve.

    Report on 20 November 2011  |  Love thisLove  0 loves
  • nickpike
    Love rating 309
    nickpike said

    Advising more debt with a financial meltdown on the horizon is irresponsible. No jobs are safe now.

    Those with cash will ride this out. Those with debt could be in big trouble.

    British banks are up to their neck in bad debt.

    Report on 20 November 2011  |  Love thisLove  0 loves
  • ains
    Love rating 4
    ains said

    Agreed the easiest way to avoid refinancing the banks is to lend less, only buy what you need as opposed to want.

    Report on 20 November 2011  |  Love thisLove  0 loves
  • Mike10613
    Love rating 626
    Mike10613 said

    If you are looking at The Eurozone crisis figures at the European banking Authority then it's a good idea to look at 'stress testing'. In the fractional reserve banking system this is how exposed a bank is, or how much cash they really have. Lloyds banking groups core tier 1 capital ratio is said to be 10.2 and likely to fall. There is a PDF for each bank. the one for Lloyds Banking Group is here - http://stress-test.eba.europa.eu/pdf/bank/GB091.pdf

    I won't be taking out loans or paying for Christmas using my credit card. I bought crackers at Lidl today; I'm not going crackers!

    Report on 20 November 2011  |  Love thisLove  0 loves
  • didigermany
    Love rating 1
    didigermany said

    I have just one question: When did the Euro crisis start?

    Report on 21 November 2011  |  Love thisLove  0 loves
  • oldhenry
    Love rating 343
    oldhenry said

    I think the Euro crisis started when they created the Euro. It was a disaster waiting to happen. The currencies that were mangled together to make the Euro were total unsuited but political pressure caused the inadequacies of many , typically southern European, states to be ignored in the euphoria that politocal union was on the way. It is sheer luck that the UK was kept out , and the awful fright that the Chnacellor had when the UK was dumped out of teh ERM. It was the one sensible move that Brown made.

    Of course the 'sub-prime' banling crisis really showed how weak many of the banks were. Their balance sheets stuffed with debt that needed to be written off. Northern Rock and RBS were bust as was Halifax. Only our tax has saved those banks, but the share holders are not grateful grumbling that they have lost hier shares. Well tough , that is what being a capitalist is all about.

    Report on 21 November 2011  |  Love thisLove  0 loves

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