Prime Rate Increases and What it Means for Business
Interest rates are rising. What does that mean for your profits?
We sat down with BECU Treasury Director Ron Crawford for his take on the improved economy. After all, a good economy hopefully translates into good sales – but what happens when it also equals higher interest rates?
“If you have a variable-rate loan, that rate will increase with an increase in market interest rates," says Crawford. “Along with rising fortunes generally comes rising interest rates.”
Why higher interest rates? The lower the interest rate, the more one may be able to afford, which can drive an increase in activity during an economic slump. As economic conditions improve, the timing of when to increase rates falls squarely on the government's shoulders.
“The Federal Reserve sets the target federal funds rate based on how the economy is performing. Raising that target rate is a way to ensure the economy does not grow too fast, which can lead to higher price inflation,” explains Crawford. “That target federal funds rate serves as the basis for the prime rate.”
The prime rate. That's the real kicker – it is part of a simple equation that helps determine APRs (Annual Percentage Rates) on a wide variety of variable-rate 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. The Federal Reserve increased the target federal funds rate for the first time in 8 years when they did so in December of 2015. What happened? Consumers saw variable-rate loans increase (not fixed-rate loans).
What happens next
Bottom line – what will happen to your business?
If you have a variable rate loan, such as a credit card, you will see the interest rate increase, as it is tied to the current Prime Rate. Have a Business Line of Credit? Your variable rate is also based on the Prime Rate, so it will increase when Prime increases.
“As a credit union, we're not-for-profit, and return profits back to the membership,” says Crawford. “One way we can return that profit is by offering lower rates. As a member of BECU, while your APR may go up, your rate will most likely be one of the lowest around.”
Who wins? All of us.
Generally, higher interest rates can actually be helpful. They often reign in escalating property prices and curb inflation. Rate increases also pour dollars into the economy, and can eventually increase 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: Log into Online Banking and visit the Message Center.