When it comes to getting a loan or financing a purchase, having an optimal interest rate is important. When you take out a loan, the interest rate is the amount of money that then lender will earn back from simply providing you with the loan. For example, if you took out a $10,000 loan on a car with a 4 percent interest rate, you will end up paying $14,000 to pay back the loan, with the lender earning that additional $4,000.
Interest rates will vary based on lender and your own financial and credit history. For example, if you have a high credit score, you’ll likely receive a lower interest rate than someone with a very low credit score. This process is the same whether you’re looking for home or car financing.
When you take out a loan, you want to get as close to the prime rate as possible. The prime rate is the term used to describe the interest rate that banks typically use for their loans. Prime rates are usually referred to as the best possible interest rate, and as mentioned above, are typically only available to individuals with high credit scores. For those with lower credit scores, variable interest rates may be used.
In the recent past, the prime rate has been holding steady at a low rate. Many homeowners have taken advantage of mortgage loan rates between 3.5 and 5 percent, which can greatly reduce the mortgage payment and decrease the amount of time it takes to pay off the loan. Even credit card interest rates have been holding steady over the past few years.
But that’s going to change.
The Federal Reserve has stated that interest rates are going to rise in the middle of 2015. This will be the first rise in interest rates since 2006. According to a report by CreditCards.com, “the Federal Open Market Committee announced that it would continue winding down its bond-buying stimulus program by cutting $10 billion from its monthly purchases, leaving the program on track to finish in October. The Fed buys Treasury bonds and mortgage-backed securities to keep mortgage rates low and support the housing market.”
This change has to do with the economy. In 2008, the United States started to experience a downfall in the economy. The cause for the economic downturn was the result of two major occurrences. First, many banks were leaner with their lending terms, and they had given loans out to people who necessarily couldn’t afford to pay them back. Because of this, businesses started to fall, and layoffs were inevitable. Now, these people with these large home loans had no income in order to pay them back, which led to not only the housing market crash, but the government’s financial bailout of the banks.
Today, the economy has finally gotten back on its feet. Companies have started to hire again, and the unemployment rate is getting smaller and smaller. Plus, due to the large number of home foreclosures, many first-time homebuyers were able to purchase a home for a lot less than the home’s value.
According to the Federal Reserve, the rise in interest will not be an extreme jump; however, this could be the sign of a prime rate that just keeps on growing.
