Interest rates have been low for a long time and it is
therefore not surprising that many borrowers worry about what might happen if
the rates go up. Anyone with a mortgage, credit card or any other type of loan
is likely to worry that they may suddenly find themselves in a situation where
they will not be able to afford the debt repayments. It is worth remembering
that interest rate increases have been very slow and this is likely to be how they
will continue. However, there is still no harm in doing what you can to keep
your debts as cheap as possible.
Compare and switch
It is wise to regularly compare lenders and see whether there are any that are significantly cheaper than others. There are many available and it might be that you can switch to another one and save a lot of money. You do need to be careful with this though. Make sure that you take note of all of the costs involved. You may find that you will be charged a fee for leaving your current lender. You need to be aware of how much this is so that you can allow for this when you are looking to see if other lenders will be cheaper. There may also be an administration fee when you take out a new loan with a different lender so check this as well.
It is also important to look at any other costs. For
example, if you miss a repayment how much will you be charged? This will vary a
lot between lenders and even if you feel that you will easily manage every
repayment it is important to have an idea of what the costs might be so that
you are well prepared. This figure may also help you to more easily pick
between two lenders that seem really similar otherwise.
Consider fixed rates
It is worth thinking about whether it might be worth going for a fixed rate loan if you have not already. These then will not change when the interest rate goes up. This can really help to protect you from rises in rates as you will not have to pa any more money when the base rate goes up.
It is worth being cautious with this though. The banks tend
to set the rates so that they do not lose out. This means that it might be
quite a bit higher than their variable rate. If rates do not rise then you will
end up paying more. However, you may prefer the security of knowing exactly how
much you will need to repay each month. It is all very personal and will depend
on your feelings towards debt and how well you will cope if rates do go up.
Pay off debts early
Another way to help keep the cost of rate rises down is to repay some or all of the loan. Without a loan or by owing less money it will mean that your interest payments will be lower and therefore you will not be paying so much so if the rates go up you will not struggle to pay the interest. You will need to check though as to whether there is an early redemption fee when you repay the loan early. This fee is often equivalent to a few months interest and so it depends on how early you repay the loan as to whether it is worth paying it or not.
Paying off debts could seem like a mammoth task but it does
not have to be. If you slowly whittle it down then you could find that it will
disappear quicker than you imagine. As you owe less and less your interest
payments will go down and you will be able to use that money that you would
have paid in interest to pay back even more of the loan. This means that you
can repay it faster and faster and so although you may feel that things are
slow to start with you will start to notice the money that you owe shrinking
quickly as you pay off more and more.
So, if you want to completely protect yourself from rate
rises, you will need to repay all of your debts. Then if the interest rates go
up it will have no impact on you whatsoever. If this is not possible then try
to reduce your debts as much as you can, but work out whether it will cost you
more to repay then, in fees compared with what you will save in interest. If
you cannot completely repay them, then see if you can swap to a cheaper lender
and also consider fixing the rate so that raises in rates will have no impact
If you have a student loan then you may have concerns about
the fact that interest rates are likely to rise in the future and cause the
loan to be more expensive. You may think that if you repay it early this will help
to save you money. However, although this could be the case, it is important to
understand more about rates as well as student loans before you make your
Interest rates have been at record low levels lately and so it has left most people assuming that the only way that they can go is up. There have been a few very gradual rises and it seems likely that there might be more. This could make many people worry that the rates may continue to go up.
While this could be the case, interest rates are very
difficult to predict. It is also worth remembering why rates are changes. The
Bank of England change the base rate when they want to change the pattern of
spending. They look at inflation, which is the increase in prices and if it goes
up too high they use an increase in interest rates to reduce it as people will
have less money to spend and prices go down. This means that if interest rates
go up and you pay more for your loans, then prices do not rise so quickly so
you are not going to be paying out more in interest on your loans. Therefore,
you should find that you should still be able to manage. Interest rates are
also unlikely to rocket really quickly unless salaries go up to match as the
Bank of England do not want people to struggle to repay loans and mortgages as
that could lead to lots of unpaid debt which could cripple the banks.
How student loans work
Student loans also work very differently to standard loans and this can also mean that interest should not be so much of a worry. The loans only have to start being repaid after you graduate and then only once you are earning about a certain amount. This means that you will be in a position where you can afford the repayments when you have to start making them. What you have to repay will only be a small percentage of the salary that you are earning above the threshold amount and so it will be manageable. If your salary goes down, perhaps because you lose your job, go on maternity leave or take a lower paid job then your repayments will also go down or disappear so you will always manage. This will not change whatever interest rates are. After thirty years the remaining balance on the student loan is written off. This means that it is possible for a graduate never to repay the whole loan and therefore they do not repay the interest as this is repaid last
If you end up being one of the graduates that does not repay all of their loan then the interest rates will have no impact on you at all. Considering that only a quarter of graduates repay their loans in full, then the odds show that you are likely to not repay it. Therefore, if you fall into this category, you do not have to consider repaying your loan in order to avoid the interest rate hikes as you will avoid them anyway. You will be able to calculate whether this is likely to be you as well and this will get easier the closer you are to getting to the end of the thirty-year period. When you first graduate you will be looking for a job and you will know whether you have something that will be in a salary threshold that you will be able to repay. You may then change jobs, be out of work, take parental leave or things like this through your career. You might be able to predict whether this will happen to you or not and you should know whether the area that you are qualified in is likely to give you a high salary. If you graduated a while ago, then you will be able to work out how much loan you have already repaid and whether you will end up paying it all by the end of the thirty year period. Repaying early is a risk as it could be that you would otherwise have not earned enough to have to repay the whole loan. However, you may want to repay it anyway as you feel that you should not be using tax payers money to find your education like this and that you would like to pay it back. However, you might feel that as you are entitled to the money and most other students do not repay their loans then you are happy with not repaying yours as well. It is a matter of personal opinion.