Should you wait for Interest Rates to be Low before Borrowing?

Borrowing money should not be a decision that you make lightly. It takes a lot of thought, not only to decide whether you really do need to borrow, but to think about when the best time is to borrow. There are many time factors that could influence this such as personal ones with regards to your career or age or more general ones such as the state of the economy and interest rates.

The Bank of England interest rates have a big effect on the cost of borrowing. This is because the rate of the interest rates sets the cost to banks of borrowing from the Bank of England; a cost which they pass on to their borrowers. This means that when Bank of England rates are low, borrowing is cheaper compared to when they are high and borrowing is dearer. It is pretty safe to assume that on a general level the cost of borrowing will be determined by the interest rates but the ease of borrowing is also a factor affected by them. If banks feel that they cannot make much profit from lending, then they may decide not to lend to so many people. They may also reduce lending in risky times, which could be related to interest rates.

The thing to note about the economy is that every part of it affects the other. So low interest rates do not come alone. Interest rates are set according to inflation, which is a measure of prices. The aim of the Bank of England when setting interest rates is to keep inflation around 2%, this means they want prices to rise a little but not too much. This allows businesses to grow but not so quickly that it is unsustainable and things become unaffordable to consumers. So if prices rise slowly,
businesses can grow a bit but they will not lose customers because their prices are not too high. Business growth is important because it means that more good will be available for people to buy and that will keep customers happy, if a company grows it can also employ more people. With more people being paid salaries, more people can afford to buy things and therefore the economy grows, with salaries also increasing at times of growth. With higher pay and more jobs available this can keep businesses and consumers happy.

In times of low interest rates businesses are not growing very fast, by keeping interest rates low, businesses can afford to borrow if they need, so they can expand or cover their costs without having to rely on increasing prices to help them. It also enables consumers with debt to keep their costs down and therefore still be able to afford to spend some money.

So if you are looking to borrow, should you wait until rates are low? Borrowing will be cheaper and so that will be good. However, it could mean that the economy is not growing and this could mean that you are taking a risk as you may find that you do not get an increase in income or you may even lose your job or someone in your household loses their job. If this happens while you are trying to find the money to repay a loan you could find that you are in real trouble. If the economy is not growing and jobs are scarce, it may not be very easy to find a new one either and this could mean that you struggle to make the repayments for a long time. If you do not make the loan repayments then you will have extra costs and may even have an increase in interest rate. An increase in rates is much more likely if the rates are low, particularly if they are extremely low. Also small changes could make bigger differences. For example, if the rate is 1% and it goes up to 2% this means that the interest that you are paying will double. This could have quite a significant impact on you. It is therefore really important to think about how you will manage should you borrow money and interest rates go up. Think about whether you will have the money to cope with a rate increase.

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