For the first time in almost 10 years, the Federal Reserve has raised its key interest rate. The Federal Reserve has increased rates by 0.25%, which is its first major increase since 2006. A lot of people don’t know what this means for them, and a lot of business owners don’t know how this will impact their small business. You probably have a lot of questions yourself. Let’s take a look.
How will this affect my personal loans, like my car, mortgage or credit cards?
You’re going to want to look at all of your loans, and check them to see if they’re fixed rates or variable. If they’re fixed, you’re good, your rate shouldn’t increase. But if it’s variable, there’s a really good chance that you’re going to see your interest rate rise over the following months and years.
Consider paying down those loans aggressively, or switching them to a low-interest rate fixed loan. That way you won’t have to deal with rising rates.
What about small business loan rates?
Small business loans will be influenced by the increase, but you probably won’t see a large jump anytime soon. The Federal Reserve usually increases rates slowly over time, so you won’t see a drastic increase in your loan interest rate.
As always, you’re going to want to find the lowest interest rate loan you can for your small business. You can always shop around and go from bank to bank, or you can use our easy loan matching tool at lendio.com.
So why is the federal reserve raising loan rates?
First off, the federal reserve isn’t raising every loan rate by 0.25%. They’re raising the federal funds rate which is the rate at which banks and credit unions can borrow from the federal reserve.
Why would banks and credit unions borrow from the Federal Reserve?
Banks and credit unions are only allowed to lend out a percentage of their money and are required to keep a certain amount in reserve. Right now, the bigger banks and credit unions are required to keep 10 percent in reserve.
The thing is, banks and credit unions make a large portion of their profits from lending out their money.
So let’s say your local credit union wants to lend someone ten million dollars for a real estate development at a four percent interest rate. That loan will earn around four hundred thousand dollars a year for that credit union. But let’s say that credit union doesn’t have the reserve money they need to lend ten million dollars, what do they do?
They can borrow the money needed from the Federal Reserve. The Federal Reserve determines the interest rate banks can borrow to have in reserve. So if that rate rises, let’s say by 0.25%, our local credit union in this story would raise that 10 million dollar loan’s interest rate by 0.25% to make the same amount of money.
So when the banks and credit unions get charged more for the loans they take out, they’ll raise the rates for the loans they give?
So, just to get this straight, I won’t see a major change anytime soon, but small business loan rates could increase over the coming years.
Exactly. The Federal Reserve adjusts the rate from time to time to help control inflation and the economy. We’ve seen an unprecedented period of low-interest rates, and with the increase in rates this week, we’ll see those rates slowly rise.