Should I get a Loan if interest Rates are Rising?

When interest rates are rising it can seem like it is not a good time to get a loan. This means that people might delay borrowing money and wait for rates to fall. It is worth considering a few things when getting a loan and interest rates are just one of them.

Do I really need the loan?

It is a good idea to always think hard about whether you really need the loan. Think about what you are borrowing the money for and whether it is really worthwhile. Consider the impact of the loan, not just the positive impact of buying the items, but also the negative impact of having to repay a loan. This can be stressful for some people, expensive and is not always easy. Decide based on this, whether you think that getting a loan will be good value for money. Remember when you are calculating this, that you need to account for the fact that when you repay the loan, there will be interest payments and possibly others costs to be repaid as well as the sum that you borrowed and you need to decide whether you feel that paying this extra money is worthwhile. Remember that if you had saved up for the item, you would not have to pay those extra costs; in fact, you may have got interest on your savings.

Can I Afford the Loan?

It is really important to make sure that you can afford the loan that you are taking out. It is vital that you find out how much the monthly repayments will be and look at your bank statements to see whether that is an amount that you will be able to afford. Payday lenders such as display this information via a representative example. So you can see specifically how much your loan is likely to cost you. You may find it hard to work out, but if you call customer services they will be able to tell you how much you will pay. If you have a variable rate of interest though, the amount you pay could go up when the base rate changes. It could be worth asking how much it will go up if interest rates rise so that you can be prepared for this. Then you will need to take your bank statements and take a look at how much money you have coming in each month and how much you spend each month. You will then be able to see whether you would normally have enough to be able to afford the repayments. If you do not, then you need to think about what you might do in order to be able to afford them. Think about whether there are things that you could give up in order to afford it or whether you will just not be able to manage.

Will I Afford it if Interest Rates Rise?

It is always worth planning for rate increases as well. If you have a fixed rate loan then any change in rate will not make any difference. However, if you have a variable rate, then an increase in the base rate is likely to mean that there will be an increase in the amount that you end up paying. It is wise to try to work out whether you will be able still afford the repayments. If you have already had to consider changing the way that you spend money in order to afford the repayments at the current rate then you may struggle even more if the rates go up. Make sure that you have a plan in place so that you know exactly what you will do if this situation happens. If you do not think that you will be able to reduce your spending then you will have to think about ways to make more money in order to afford the repayments. This may be easier for some people than others and you will need to be confident that you will be able to do this before taking on the loan.

So, it is not necessarily a bad thing to take on a loan when the rates are rising but you need to make sure that you are going to be able to do this. You will need to be aware of how much it will cost you and whether you will be able to afford those repayments. Then consider how much more expensive they might be if the rates go up and whether you will be able to afford them now. Although this can be a bit tricky to do, it is well worth spending the time to do the research so that you can go into the loan knowing that you will be able to afford it regardless of rate changes. That is, of course, as long as you are able to justify taking out the loan in the first place and there are no other possible options.

Can I Predict Interest Rate Rises?

Interest rate rises can be stressful if you have a loan with a variable interest rate or if you are thinking of taking one out. It can be tempting to try to find a way of predicting when the rates will rise, so that you can decide when the best time to take out a loan might be and to be prepared if you already have a loan. However, what are the ways to predict it?

What are rates now?

Knowing what rates are at the moment is a good place to start. The rates tend to have a bigger chance of going up if they are low, especially if they are very low and they will have a bigger chance of falling if they are high. This is because they tend to fluctuate within a certain amount – historically between about five and ten percent. They have gone historically low and high at times though so they do not always behave as expected. This is the main challenge with trying to make predictions. There are so many factors that might influence whether they will change or not that it can be very hard.

Have rates changed lately?

It can be worth looking at whether rates have changed lately. The Bank of England keeps records of this and you can take a look at how often rates change and by how much. This might help you to predict when it is likely that rates might change. They tend not to change in quick succession, but this has happened at times. If you look for patterns in the figures though it might help you predict more accurately.

How are the panel voting?

There is a panel at the Bank of England that vote on rate changes. The results are published monthly and you will be able to look at them to see how many voted in favour of a rate change and in what direction. This might give you an indication of whether there is likely to be a change as if no one voted for one in the previous month it would seem unlikely that they would all suddenly vote in favour of a change the following month.

What is inflation doing and likely to do?

The decision as to whether to change the interest rates is mainly based on inflation. The aim of the Bank of England is to keep inflation as near to 2% as possible by adjusting interest rates and using other methods. This means that if you keep a check on inflation then you might have an idea as to whether the rates might be likely to be changed. However, inflation can be hard to predict, so until the figures actually come out you will not know.

As you can see there are quite a few things that you can use as an indicator. You could also look at the opinions of economists who might like to try to predict what might happen in the future with regards to interest rates. However, it is very hard to predict in the long term as there are many factors that might be an influence such as things going on abroad as well as in this country. A sudden stock market crash or things like this are impossible for anyone to predict.

It can be much easier to just assume that the rates might go up and then prepare for that. Then you will be ready in case that does happen. It can be annoying that your loan gets dearer, but this is a risk that you will always have to take. It may get cheaper rather than dearer as well, so it could end up that you will be paying less for the loan. If you do want to protect yourself against rate changes then you can get a fixed rate loan. This guarantees that the rate will not change. This can be good as you will always know exactly how much you will be paying, but it can work out dearer if the rates fall or stay the same as the rates tend to start out higher than the variable rate. You will therefore have to decide whether you would rather pay the same amount and risk that you lose out or just pay a variable rate so you can take advantage of rate reductions but you risk having to pay more if the rates rise. It is only worth taking this risk if you are confident that you will be able to afford to repay the loan if the rates are higher. Make sure that you take some time to calculate how much you can afford now and what you might be able to afford in the future so that you can be confident that you will be able to manage your finances.