Rates are increasing – what does that mean for future loans?
Record employment and a robust housing market all equal one thing: an improving economy. However, a more financially sound America sets the stage for rising interest rates.
Percentages play a large role in many areas of our lives, from determining the house we can afford to the car we buy, items we finance and even education we obtain. In December 2015, the Federal Reserve raised rates for the first time in years, and those rates continue to rise.
Why raise rates? After all, the lower the interest rate, the more one may be able to afford; a key component to keeping rates low during an economic slump. Thus, whenever our country rises out of economic turmoil, so do interest rates. Such a decision to increase rates often falls on the shoulders of the Federal Reserve: Their role is to measure both national and international economic temperatures, determining whether Americans can reasonably afford higher rates. The Federal Reserve merely sets a “target federal funds rate,” which serves as a basis for the Prime Rate.
That Prime Rate is the real kicker – it is part of a simple equation that helps determine APRs (Annual Percentage Rates) on a wide variety of loan products: In most cases, the Prime Rate + Margin = APR. If the Fed's rate goes up, Prime typically goes up. And if Prime goes up, so does the APR on a variable-rate loan. The Federal Reserve increased the target federal funds rate for the first time in 8 eight years when they did so in December 2015. What happened? Consumers saw most available loan ratess increase.
Rate Increases and You
Bottom line – what happens to you when the Prime Rate increases? Hopefully, you're a BECU member. As a credit union, we're not-for-profit, and return profits back to the membership. One way we do that? Lower rates. Your APR, while it may go up, is still one of the lowest around.
If you have a variable-rate loan, such as a BECU credit card, you will see the interest rate increase, as its rate is variable, meaning it is tied to the current Prime Rate. Have a BECU Home Equity Line of Credit? Your variable rate is also based on the Prime Rate, so it too will increase when Prime increases. BECU's Home Equity Line of Credit does offer the ability to lock in a fixed interest rate with up to three Fixed Rate advances at a time.
Who Wins? Everybody.
Generally, higher interest rates can actually be helpful. They help reign in escalating housing prices and curb inflation. Rate increases also pour dollars into the economy, and can positively impact deposit rates for savers.
Have More Questions? We've got Answers!
As a member-owned credit union, we're all in this together. Feel free to stop by one of our branches, give us a call 800-233-2328, or send us a secure message by logging in to Online Banking and visiting the Message Center.