The Impact of the Rise in Interest Rates on Debt Recovery
As the Bank of England continues to combat rising prices, interest rates have steadily increased. On 3 February 2023, the Bank of England Monetary Policy Committee voted to increase the base rate from 3.5% to 4%. This is the tenth time the Bank of England will increase the benchmark fee since December 2021. The base rate is also at its highest since 2008.
Base rates are the interest rate that the Bank of England sets for loans to other banks. This rate serves as a standard for interest rates in general. As such, it will also impact customers’ buying habits, business activities, and late payment interest.
This article discusses the reason for the UK’s rising interest rates and how it affects late payment/debt recovery for businesses. It will also address debt recovery Solicitors’ roles in ensuring businesses recover their monies regardless of interest rate hikes.
Why Have Interest Rates Gone Up?
As mentioned, the Bank of England has increased interest rates (bank or base rates) from 0.1% to 4% since December 2021. This is in response to the alarming high inflation rates that have ravaged the country’s economic climate. As a result, the cost of borrowing increased for many individuals and businesses. However, the increasing interest rate is the most effective method the Bank of England can employ to reduce soaring prices.
For an economy to be healthy, inflation rates must remain low and stable to ensure monetary value remains constant. The Bank of England is responsible for keeping the inflation rates at a maximum of 2%.
As the Bank of England increases interest rates, people will have less borrowing power and be motivated to save. This means they’ll also spend less, resulting in low demand for goods and services. With declining demand comes a reduction in product prices.
How High Could Interest Rates Go?
No one, not even the Bank of England, can predict with 100% accuracy how high the interest rates can rise. It depends on the economy and inflation rates in the next few years. However, one thing is sure — the Bank of England will continue reviewing its monetary policies to curb inflation. If this means a continuous increase in bank rates, they’ll have no option but to explore that route.
The Bank of England reviews the economy and decides on interest rate increases every six weeks. So, they will likely make the next decision on interest rates on Thursday, 23 March 2023.
However, analysts believe interest rates may peak at 4.5% . While that’ll be a new peak, it’s a significant fall from the over 6% interest rate predicted some weeks back.
What’s the Interest on Late Commercial Payments by Debtors?
Late payment is one of the major concerns businesses face in the UK. According to the Credit Protection Association, half of SMEs suffer late payments. As a result, these affected SMEs are at high risk of business failure due to limited cash flow.
Fortunately, the government stepped in to solve this problem by introducing the Late Payment of Commercial Debts (Interest) Act 1998. The purpose of this Act is to discourage late payments and ensure that creditors receive compensation for them.
This act stipulates the rate of interest businesses may demand from debtors that are late on their payments. The interest rate is 8% above the Bank of England base rate. This interest starts counting from the day the debt becomes due.
How the Rise in Interest Rates Affect Debt Recovery
An increase in the Bank of England’s interest rates directly affects contractual and late payment interest rates against debt owed. However, the Late Payment of Commercial Debts (Interest) Act freezes interest at the rates that are in place on 31 December and 30 June. Therefore, despite interest rates going up to 4%, the Late Payment Act will apply the rate as of 31 December 2022 which was 3.5%. However, this base rate is added to a statutory 8% per annum meaning that creditors claiming under the Late Payment Act can claim interest of 11.5% per annum on debts that become due between 31 December 2022 – 30 June 2023.
For example, if a debtor owes £1,000 with the current bank rate of 3.5%, the annual statutory interest on this would be £115 (1,000 x 0.115=£115). So to get the daily interest, you’ll have to divide £115 by 365 days. This will amount to 31p per day.
Why Do You Need Debt Recovery Solicitors?
As inflation and interest rates rise, People might be compelled to use more of their income for non-discretionary purchases. Unfortunately, this means they’ll have less money to pay debts and are bound to default on their responsibilities. That’s bad news for cash flow needed to sustain your business.
Recovering money from debtors in these trying times has undoubtedly become a daunting task. As such, you may require the services of an expert (debt recovery Solicitor) to do the work for you.
From sending demand letters to commencing court action and everything in between, we’ll ensure payment is forthcoming as soon as possible. In addition, debt recovery Solicitors will provide you with quality advice and guidance when necessary.
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