Loan Interest Rates available to borrowers is mainly influenced by the Fed discount rate, which is the rate at which banks and financial institutions borrow from the Federal Reserve. Federal Reserve discount rate is influenced by different forces in the economy, and reflects general market conditions.
Factors Affecting Loan Interest Rates
Movement of loan interest rates is influenced by several forces, most of which are a borrower or lender’s control, including:
General economic conditions: Individuals and institutional lenders are more willing to lend money in a growing economy. Then an increase in demand driving up interest in the loan market. Conversely, lowering interest rates in a declining economy.
Federal government actions: The federal government plays an important role in changing interest rates on loans, because it is the largest borrower. It also has a maximum claim on the resources available in the market. The federal government changes the resources available in the market to contain inflationary and deflationary pressures. This in turn will increase and thus depend on the interest rates.
International forces: If the availability of foreign loans in the U.S. reduces demand for domestic loans. This reduces the interest on loans. Conversely, when foreign lenders to sell their holdings and reinvested outside the U.S., the domestic demand for loans increases, which is a general interest in the loan market pushes.
Dollar-value fluctuations: The U.S. dollar is widely used worldwide and is the main currency for international trade. Orderly fluctuations in currency markets could significantly change the dollar value. Significant movements in exchange rates could force the Fed to influence U.S. monetary policy. This in turn affects loan interest rates.
Loan Interest Rates: Determinants
Loan interest rates offered to a borrower depends on the following factors:
* Credit rating: People with a healthy credit rating are able to offer lower prices to get loan than someone with a spotty credit history, are careful with the repayment of loans.
* Debt-to-income ratio: Individuals with a high debt, even if he / she meets monthly payments efficiently, making lenders reluctant to lend. Lenders usually setting up a higher interest rate for these people to the increased risk associated with them face.
Loan characteristics such as loan amount, lock-in period and duration also affect the loan rates on individual borrowers.