Debt consolidation time looms as crunch hits banks

The giant Swiss bank UBS has announced that it has written off a further $10 billion (£4.9 billion) in “sub-prime” losses and sold an equivalent amount of its business to new investors as the credit crisis worsens.

UBS has also announced that it will be paying its shareholders in further shares this year as it seeks to find creative ways to hold on to its cash reserves. The value banks are attaching to cash at the moment could lead to higher lending rates in the near future – meaning the time for debt consolidation could be now.

Banks fight to avoid Rock repeat
UBS has told its investors that it has sold 19.4 billion Swiss francs (£8.2 billion) in new capital by selling stakes to the Government of Singapore and an unnamed investor in the Middle East. It has done this to raise cash to cover the $10 billion it has written off because loans it has made in the USA will not be repaid.

The “credit crunch” created by banks panicking as millions of US mortgage-payers default on their loans has led to banks jealously guarding their cash hordes and go to increasing lengths to avoid a repeat of the Northern Rock fiasco. The bank was brought to financial collapse by savers rushing to take their cash out of its vaults.

Debt consolidation goes up as Cash is King
The premium banks are now putting on cash makes them more unlikely to loan it out cheaply, as they have done for the last ten years. If anything, interest rates on debt consolidation loans are more likely to go up in the near future.

That means that there may be no time to lose for anyone thinking about debt consolidation. Waiting could cost money as the debt consolidation loans on offer get snapped up and are replaced by more expensive ones.

Could we see cheap debt consolidation again?
December’s Bank of England interest rate cut has been widely seen as a signal that interest rates could fall in 2008, making debt consolidation cheaper.

But in the immediate aftermath of the Bank of England decision, the interest rates that banks use to lend money to each other actually went up – which is very unusual.

If banks are going to charge each other more, many experts would argue they’re hardly likely to charge consumers less. That argument would support the view that the best debt consolidation loan rates will go up in 2008 – and the time to consolidate is now.

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