Loans, Lending

Every time the Bank of England's (BoE's) base rate goes down, the price of some existing loans and mortgages - known as 'tracker' loans and mortgages - will change immediately. After all, they're called tracker loans and mortgages because they track the base rate.

Lenders may also drop the cost of their new loans and mortgages - and of their existing SVR (Standard Variable Rate) loans and mortgages - but they don't have to. The base rate isn't the only factor in lenders' calculations. When they're figuring out how much to charge for credit (from fixed-rate mortgages to debt consolidation loans), they also look at the state of the economy, the availability of credit from the BoE and from other lenders, the probability of other lenders going bust...

Basically, when banks are worried, they're less likely to offer loans - not just to consumers, but to each other too. It's partly because they're worried about their own finances and partly because they're worried about each other's!

The average interest rate at which banks offer loans to each other is called the LIBOR (London Interbank Offered Rate), and this is the rate that really indicates how much a loan (a debt consolidation loan, for example, or a mortgage) will probably cost you. In general, when the banks are feeling confident, the LIBOR rate will be close to the base rate. When they're not, it'll be higher, as banks increase their margins to bring in bigger profits.

So LIBOR matters - not just for would-be homeowners, but for people in debt, too. An example: Mr Smith can't really keep up with his repayments to his unsecured debts, and he's thinking about taking out a debt consolidation loan to pay off all his unsecured debts in one go. If the LIBOR rate is low, he may well find a debt consolidation loan at a good rate; if it's high, any debt consolidation loan he finds could cost him more.

For Mr Smith, it's an important issue. After all, one thing that people like about debt consolidation loans is that they let them pay off their high-interest debts with a relatively low-interest loan. The lower the rate on that debt consolidation loan, the more appealing the idea of debt consolidation is.

So the higher the LIBOR rate, the less likely Mr Smith is to go ahead and take out a debt consolidation loan. If the only loans he can find would come with high interest rates, he may decide to look into different debt solutions - different ways of reducing his monthly debt repayments and bringing his finances under control. If, for example, he genuinely can't keep up with his monthly debt repayments, a debt management plan could help him bring them down to a level he can afford.

Of course, even if he finds a debt consolidation loan with a low interest rate, he might still be better off with a debt management plan. And debt consolidation and debt management aren't the only debt solutions available - so the best way for Mr Smith to get started would be to talk to a professional debt adviser who can explain all his options and help him choose the most appropriate one.