5 Factors That Impact Lending Rates For Consumer Financial Products

Interest rates fluctuate from year to year. These fluctuations have a ton of implications on stock market performance, economic growth and a number of important areas. Still, most consumers do not know what influences interest rate changes. Understanding these interest rate influences could be financially beneficial, however. It will allow you to make the most informed lending choices possible. If you want to improve your financial understanding, keep reading to learn the factors that determine lending rates for consumers like you.


Inflation is one of the biggest influences on national mortgage rates. Low interest rates will help to keep inflation at a minimum. On the other hand, high interest rates expedite inflation rates. These inflation consequences are frequently considered when determining the current prime rate. That current prime rate, the interest rates that commercial lenders charge large-scale corporations, ultimately affects consumer interest rates on mortgages and auto loans. When you are looking to understand current prime rates, look to inflation data to determine the relationship.

Supply & Demand

Supply and demand for lending solutions will also certainly affect loan interest rates. The higher consumer demand is for financing products and credit, the higher lending rates will go. Inversely, the lower consumer demand for financing a home loan, the lower the interest rates. Ultimately, there is no real way for you, as an individual consumer, to determine demand for credit supply on a large scale. However, there is sure to be resources in financial newspapers and economic newsletters that will help you get an idea of supply and demand. Remember this the next time you want to understand current lending rates before making a big purchase.

Open Market Transactions

Federal open market transactions also have a direct influence on current interest rates in the United States. The Federal government uses open market transactions to help lower interest rates for consumers. This is done by the federal government buying back U.S. securities that were previously issued. Similarly, the Feds can use an open market transaction to increase interest rates by selling federal securities. Ultimately, that leaves banks with less liquid capital to lend to consumers, which increases lending rates. If you later learn of a federal open market transaction being underway, you can now understand its implications on potential lending rates for yourself and other consumers like you.

Default Rates

The amount of defaults currently existing in the market will also impact current lending rates. Of course, most would assume that a higher number of defaults would lead to an increase in interest rates. And it does, for a limited amount of time. When the number of defaults in market climbs however, the Federal government will step in. At these times, they will frequently choose to begin an open market transaction. That is because it helps them lower the prime rate to avoid ever more indebted consumers from defaulting on loans. Ultimately, that also helps the Federal government owe less interest on their own outstanding debts. It is a win/win situation for everyone involved. Remember this when you are trying to understand the current interest rates for lending products and their effects on your cash flow management capabilities.

Financial Institutions

Financial institutions also have a huge bearing current lending rates. More accurately, their own monetary capabilities are what affect current interest rates. If a bank does not have the financial capability to lend money to credit-seekers, it will go bankrupt. When financial institutions go bankrupt, the prime rate soars. There are fewer funds to be distributed to those seeking credit. However, this is another instance where the federal government will frequently step in to keep the current prime rate low and keep the economy in one piece. One well known occurrence of such an event was during The Great Recession of 2008. Use this example to help you understand how the current prime rate is impacted by the solvency of financial institutions.

If you are an average consumer, you probably have very limited knowledge of how the current prime rate is set. You may have even less knowledge of how those prime rates impact your own interest rates for mortgages, auto loans and other financial products. Use this post to help you learn about the topic. The factors detailed above are all some of the biggest influences on lending rates in the United States and abroad. Once you understand how your current interest rates are impacted by prime rate factors like the ones detailed above, you will be able to make better financial decisions for your own personal financial well-being. Deep down, that is all anyone wants. Then, you can use your new knowledge to learn what a certificate of deposit is and how the prime interest rate affects those holdings.

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