Interest Rates

Interest Rates - Its a game and the banks are winning!

Interest rates determine how much we pay for everything.  Whether it’s a home loan, auto loan, balance transfer, student loan or any type of loan its the interest rate which will ultimately make a consumer able to afford the item or not.  In the 80’s mortgage rates were sometimes 15 or 17% - a rate unaffordable to almost all consumers in today’s age.

In the united states many of the interest rates lending institutions use are guided by changes to key rates issued by the Federal Reserve – such as the FED prime rate, while other institutions simply use the prime rate as a base for calculating interest rates offered to consumers.  For example, your credit card company will offer a variable interest rate which is calculated by adding the prime rate + a specific margin internally calculated for credit risk and profit.

Many consumers try to understand how banks determine interest rates on such common instruments as credit cards and auto loans however the only rhyme or reason behind understanding this is simply understanding the rules of a free market.

Banks and credit card companies can pretty much charge whatever they want so the key solution to gaining market share is to offer low rates.  The lower the rate, the more market share a bank hopes to get.  In a perfect world this makes some sense and helps keep consumer interest rates relatively low.

However, banks and credit card companies have lobbied successfully over the years to allow “across the board” rate increases for one time late payments, late fees representing an unimaginable interest rate if calculated using a “percentage of your balance” calculation and more.

Remember, It’s up to you - the consumer to play the interest rate game.