Unsecured debt rates 'set to rise'

Interest rates on credit cards and loans are expected to rise by between 2% and 3% in the next three years, meaning the average household will have to stump up an extra £1,800 a year to pay the interest on their unsecured debt, a study by accountants PwC has revealed.

The group revealed that new regulation which requires banks to hold more capital, coupled with the ongoing liquidity shortage, will drive up costs. However, interest charged on unsecured debt is not directly linked to changes in the Bank of England base rate.

PwC warned that 2011 is to be a difficult year for credit card providers as consumers opt not to borrow and instead concentrate on reducing their debts.

In 2010, the average household reduced its unsecured borrowing by £500, while the trend to pay debt should continue, albeit at a slower rate of approximately £300.

Richard Thompson, partner at PwC, said: "There is strong evidence that the type of credit demanded by consumers is changing.

"Point of sale finance products, payday loans, home credit providers and pawnbrokers will all play their part in providing for these kinds of consumers."

PwC warned that further regulation of the consumer credit market in the future, including a possible cap on the interest rates that can be charged, meant it was likely to become increasingly uneconomic for lenders to offer credit to many people.

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