Overdraft Interest Rates

cutsilver

I have an o/d with the RBS currently charging 17% APR. They set their rate in April 2008 corresponding with the most recent peak in Base and LIBOR rates. Obviously the base rate and even LIBOR have dropped dramatically since April but my branch have informed me that the rate that they charge personal customers for o/ds (and personal loans) will not be changing as this rate "is not linked" to the base rate or LIBOR. Does anyone have any knowledge of whether the retail banks are being asked/told to reduce rates on personal (as opposed to business) lending? All of the news seems to be about helping out businesses but what about individual customers who are being gauged at these interest levels? :mad:

opinions4u

Overdraft rates are driven by a number of factors.

1) The credit interest rate paid to other customers with the account.
2) The level of bad debt within the current account book.
3) Pressure on margins elsewhere within the bank as a whole (like if they are going to make a loss this year, why would they reduce their rates on your overdraft?)
4) The income from other fees generated by the account (currently under threat from the oft).

This is by no means an endless list.

My guess is that point (2) above will be the main reason for not reducing rates. More debts will be going bad, and everybody else has to pick up the bill.

If you don't like it, move your account elsewhere.

Alliance & Leicester seem to have a 0% overdraft offer. Read the small print carefully though.

cutsilver

Thaanks for your response. As a recently redundant corporate financier I understand the straight commercial reasoning. My point is that if the government wants to get consumer spending moving it would make sense to get the banks to bring down rates on personal debt as well as commercial - all of your points are true of business accounts as well as personal current accounts. Finally, I would be surprised if A&L would be happy to take on my O/D and bank loan now that I am unemployed!

opinions4u

cutsilver wrote: »

My point is that if the government wants to get consumer spending moving it would make sense to get the banks to bring down rates on personal debt as well as commercial

While this is all true, it makes no sense whatsoever to force banks to lend on terms that aren't commercially sustainable to individuals and companies that can't afford to repay.

Bad lending got us in to this mess and more bad lending most certainly won't get us out of it!

Banks should lend responsibly and in a sustainable manner in good times and bad. This means interest rates reflecting risk and ensuring that profitable lending supports the balance sheet before paying ever increasing dividends to shareholders.

cutsilver

Agreed but I don't think that current margins fairly reflect the risk involved. The banks find themselves in the fortunate position of having their return on o/d interest substantially improved because of the MPC's decision to reduce base rate and the concomitant reduction in LIBOR. The new rules requiring them to behave fairly in their dealings with customers should surely include fair pricing on their debt products ceteris paribus.