Bank of England Base Rate?

idavies66

Does anyone understand what the BOE base rate of 0.1% actually means? As I undertand it this is the amount of interest that banks and financial services companies can borrow from the government (i.e. taxpayers)? Why are personal loans charged at ~3%, credit cards at ~20% and overdrafts at ~40%. Sure banks & FS have costs and overheads so 3% sounds OK, 20%+ for what is basically free money ... totally obscene!

Willing2Learn

idavies66 said:

Why are personal loans charged at ~3%, credit cards at ~20% and overdrafts at ~40%. 

Because an overdraft often means that the customer is living beyond their monthly budget.  And credit cards are interest-free, if you pay the balance in full each month.

[Deleted User]

What about the default rate?  How should that be paid, if not through interest on the money borrowed?

kuratowski

idavies66 said:

Does anyone understand what the BOE base rate of 0.1% actually means? As I undertand it this is the amount of interest that banks and financial services companies can borrow from the government (i.e. taxpayers)?

Banks fund themselves through various sources, overall though their cost of funding is far higher than the base rate.

John_

idavies66 said:

Does anyone understand what the BOE base rate of 0.1% actually means? As I undertand it this is the amount of interest that banks and financial services companies can borrow from the government (i.e. taxpayers)? Why are personal loans charged at ~3%, credit cards at ~20% and overdrafts at ~40%. Sure banks & FS have costs and overheads so 3% sounds OK, 20%+ for what is basically free money ... totally obscene!

The short answer is credit rating. HSBC are significantly more likely than you or I to pay back a loan as agreed, in full, and on time.

Thrugelmir

idavies66 said:

Does anyone understand what the BOE base rate of 0.1% actually means? 

A simple response. 
The BOE is the lender of last resort. Every night banks are required to balance their books. Within this they are required to hold so much liquidity. If a bank is unable to borrow from other banks to do achieve this. It borrows the money from the BOE overnight at base rate. The following day the monies are repaid.

Personal loans are advanced in a very controlled manner. Strict underwriting criteria  and risk management. Furthermore loans will more often or not be offset against fixed term deposits. 

Credit cards are a fairly loose form of lending with a high default rate of non payment. Other cc customers bear this cost. Lenders are required to keep reserves on their balance sheets to offset the credit limits granted. This in inself incurs  cost to the lender. 

Overdrafts, Similar to credit cards as above. Additionally high level of manual intervention, Employing people is very expensive once all costs are taken into account. Overdrafts aren't normally permanent balances but move around markedly. Therefore 40% has to be put into context. Average overdraft user only borrows for a matter of days. 

Longer term expect to see banks wean customers of overdrafts to more suitable forms of borrowing. There's been a progressive tightening of regulation of mortgages, payday loans, credit cards and now overdrafts. This will continue. As impossible to tackle all issues head on. A drip drip of increased regulation.