Consumer Loan, Savings Rates Creeping Upward
Thursday’s boost in the prime rate merely confirmed what consumers have been discovering on their own in recent weeks: Rates are rising on mortgages and other consumer loans as well as on certificates of deposit and other forms of savings.
Those rates are likely to continue rising in the next few weeks, economists predict. That is bad news for consumers seeking financing for homes or cars--and could push some to hurry their buying to beat further increases. But it is good news for those looking to earn more on their savings.
The prime rate rise will automatically boost rates further on home equity loans and variable-rate credit cards, which are among the few brands of consumer borrowing tied directly to the prime. Rates on home equity loans nationwide are currently running about 11% and should rise to between 11.25% and 11.5% before long, said Robert Heady, editor of Bank Rate Monitor, a North Palm Beach, Fla., newsletter that tracks bank rates.
Variable-rate credit cards, which offer lower rates than fixed-rate cards but are still relatively rare, currently range from 12% to 17%, Heady says.
“Consumers will see higher borrowing costs passed on with the next billing cycle,” Heady said.
By contrast, fixed-rate credit cards, which average 18.21% nationally, probably will not budge at all “because they have been stuck in cement for a long time,” Heady said.
While most consumer rates are not directly linked to the prime, they could still rise if investors and the Federal Reserve fear higher inflation stemming from overly robust economic growth and the Midwest drought. Such fears would push up rates on Treasury bills and other securities in the credit markets that affect consumer rates. Thursday’s prime rate hike, experts said, only confirmed that banks believe recent rises in credit markets will stick for a while.
“It means that these rate increases will hold and were necessary and justified, not just speculation in the credit markets,” said Dennis J. Jacobe, director of research for the U.S. League of Savings Institutions, a trade group for the savings and loan industry.
Among rates not tied to the prime, fixed-rate mortgages are expected to continue to rise modestly, said Joel Singer, chief economist for the California Assn. of Realtors. The average national rate on 30-year, fixed-rate loans was 10.38% as of last Friday, according to the Federal Home Loan Mortgage Corp., also known as Freddie Mac.
This week, mortgage rates began to take off again, thanks to renewed inflation fears since last Friday, when the government announced that the U.S. unemployment rate had fallen to 5.3%, the lowest level since May, 1974. Robert Van Order, chief economist for Freddie Mac, expects the agency to report today that this week’s national average fixed-mortgage rate jumped to about 10.5%.
By year-end, fixed-rate loans could be as high as 11.5%, Jacobe of the U.S. League of Savings Institutions predicted.
(However, initial rates on adjustable-rate mortgages--ARMs--may not rise as much, in part because lenders are flush with cash to lend and would rather have borrowers take these loans instead of fixed-rate loans because ARMs pose less risk to lenders, Singer said.)
Also likely to move up are rates on unsecured personal loans. The average national rate on unsecured 24-month personal loans rose to 16.05% this past week, up sharply from 15.83% the week before and from 15.45% on March 30, according to Bank Rate Monitor. Among the 10 largest banks in Los Angeles, the current average rate is far higher: 19.29%.
Good News for Savers
Auto loan rates, however, are less likely to rise sharply, due in part to continued strong competition for those loans between banks, credit unions and auto manufacturers’ finance companies, experts say.
Rates on four-year auto loans offered by banks have crawled slowly upward to an average of 10.98% last week, unchanged from the previous week but up from 10.76% on May 11, according to Bank Rate Monitor. Rates at credit unions and auto finance companies are usually lower.
As for savers, the news is likely to be good for the next few weeks, if predictions of higher rates come true.
Increases may be in store for CD rates, as they had been relatively flat for the last month until this past week, when the average national yield on six-month certificates rose to 7.21% from 7.15%, according to Bank Rate Monitor.
Rates on money market mutual funds have already jumped considerably in recent weeks, to 6.70% this week from 6.13% on May 3, said Susan Cook, editor of Donoghue’s Money Fund Report in Holliston, Mass. That rise, along with recent declines in the stock market, reversed recent outflows of money from these funds, Cook said.
Main Story, Part I, Page 1.
