Debt consolidation ‘best way to respond to low base rates’

There are many ways to respond to low interest rates, but debt consolidation is the best, an expert has said.

Chartered financial planner at Informed Choice Martin Bamford noted many people have benefitted from the record low 0.5 per cent base rate since March 2009, but while mortgage payers and others with loan rates linked to the cost of borrowing have saved money, there is a “choice” over how individuals and households could respond.

He said: “You can either use the savings you make on the cost of debts to go out and spend more, or you can save more as a result of having more money or you can try to reduce the overload of your debt.”

Mr Bamford advised that the last of these is the “most sensible” as it will help the borrower in the future when rates do go back up.

However, he noted, “human nature” is such that many will decide to spend the extra money instead.

Those who do decide to use the money for debt consolidation may find the best approach is to pay off unsecured borrowing starting with the most expensive debts first, such as credit or store card balances.

Last month, the Bank of England’s Monetary Policy Committee was unanimous in voting for the base rate to remain the same, the first time this had happened since May 2010.

As recently as May this year three members supported raising the rate, the strongest support for change since the current cost of borrowing was set.

By James Francis