Well… we couldn’t expect the near zero interest rate set by the Federal Reserve to last forever! In mid-December the Federal Reserve increased interest rates for the first time since 2008. It has been almost a decade since the last rate hike to the federal funds rate and, contrary to what many believe, a rate increase should come more as a relief than a scare. A hike to the federal funds rate signifies that our economy is strengthening. This is a good sign because it proves the U.S. central bank is optimistic about the economy’s ability to handle higher borrowing costs.
With that being said, no one likes to see their interest rates going up. That is, unless it is an increase on the rate of returns offered on items such as bank deposits, certificates, savings or money market accounts. But for consumers worried about the interest rate on loans, they are somewhat justified because any increase to the federal funds rate generally impacts all types of consumer interest rates. Nevertheless, an increase from 0.25 to 0.50 percent isn’t going to immediately cause a significant impact. However, if the Federal Reserve follows through with their intent to slowly continue increasing rates throughout the next year, consumers will definitely start to notice.
Consumers should also note that although the increase to the Federal Funds rate does influence interest rates consumers receive, it doesn’t directly control it. So while some banks will elect to mimic the actions of the Federal Reserve, not all of them will decide to do so. With that being said, consumers will have various choices and can elect to shop around for the best options.
How this will Impact 2016 Interest Rates
Any interest rate that is tied to the prime rate will start to increase. This is because the federal funds rate influences the Prime Rate (“Prime”), which is used as a gauge for determining rates for things like credit cards, home equity loans, lines of credit, auto loans, personal loans and small business loans.
If your card doesn’t have a fixed interest rate and is adjusted daily, consumers should expect to see a change. If things go as planned and the Federal Funds Rate increases periodically throughout 2016, consumers are going to start feeling the impact. Some consumers will even begin to notice a slight increase within a couple of billing cycles now that Prime has increased.
For homeowners with a variable-rate loan it might be time to consider refinancing because mortgage rates are going to continue to slowly increase as long as there is moderate economic growth. Economists predict that over the next year, 30-year fixed mortgage rates may increase to as high as 4.50% by the end of year. This is not an astronomical hike but is quite a bit higher than the current rate a year ago, which was 3.73%.
Car dealerships proved that spending money to make money works because they had a record year in 2015. Spending money to subsidize lower rates for their customers has proven extremely successful so it is predicted that auto loan rates will remain where they are and that automakers will continue offering low-APR promotions to expand their customer base.
Home Equity Loans
This type of loan typically remains in-line with the prime rate so it is predicted to mimic the federal rate. Therefore, if you currently have a line of equity on your home you will probably notice an increase within the next month or so.
- Federal Student Loan (after 2009)
Rates will remain unchanged because loans were/are issued at a fixed rate.
- Direct Loans (prior to 2006)
Rates will increase because loans were issued at a variable rate, which is determined annually.
- Private Student Loans
Those with fixed rates won’t be affected but those with variable rate loans, should expect an increase within the same increments as the federal funds rate.
- Refinanced Student Loans
If you refinanced to a variable rate loan, rates will likely increase and may even surpass the increments made to the federal rate.
Interest Rates and Small Businesses
It would be sensible to think that an increase to the federal funds rate would be somewhat of an advantage to those looking to obtain a loan to fund their small business venture. A higher interest rate would mean lenders could turn over more of a profit and therefore, lighten up on the requirements for approving small business loans. However, a small increase of only .25% won’t be significant enough to stimulate any major changes so the same difficulties for obtaining a loan from traditional lenders will remain. That means borrowers turning to traditional banks for funding will continue having to:
- Meet industry-specific standards
- Have enough collateral for backing the loan
- Possess high credit scores (personal and business)
- Prove they are experienced
- Be without cash flow problems
These stipulations often pose the greatest difficulties for startup businesses that have young entrepreneurs who have yet to prove themselves by establishing a solid credit and work history. It also proves to be a challenge for business owners that may have experienced personal or work related financial difficulties in their past and as a result, have poor credit scores.
So- what can these borrowers do to get around these hurdles?
There are options for borrowers that don’t meet all of the specific requirements but that have real estate to use as collateral to secure a loan. They can turn to a Specialty Finance Lender like ReProp Financial where we fund loans directly through collateralized financing. ReProp Financial is a niche real estate collateral lender that specializes in providing loans for commercial, industrial and agricultural businesses.
If interested in obtaining a private or SBA loan (our experts also help businesses obtain SBA 504 loans), contact ReProp Financial today!