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Is It Clever To Borrow In A Foreign Currency With A Low Interest Rate?

As the difference between UK and European Central Bank interest rates is now more than two percentage points, a number of people in the UK have taken a very close look at the pros and cons of borrowing in a foreign currency and converting to sterling - to take advantage of lower interest charges. But is it worthwhile?

On the surface this seems like a very opportune arrangement and one which could do quite well, but there are drawbacks :-

Currency Charges

Each month you will need to send your repayment in the original currency and this will incur currency exchange charges each and every month the loan is live.

Currency Movement

While you may or may not have fixed your interest rate on the loan, there is a chance that currency rates could move against you over the life of the loan meaning the sterling equivalent which you are paying back increases.

Interest Rate Movement

If the interest rate on the foreign currency rises then the rate you pay will increase, unless you have taken out a fixed loan, negating much of the initial benefits.

As they say in business 'there is no such thing as a free lunch' and it if looks too good then there is probably something which you are missing!

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