Yesterday the Federal Reserve lowered its target for the federal funds rate to between zero percent and 0.25 percent. How will this affect the rate consumers pay for home and auto loans?
Not much — at least in the short-term. Three things distinguish the loans affected by the rate from the ones you and I take out:
- The loans are made between large banks, not to companies or consumers.
- The value of the collateral is relatively stable, unlike a car, which declines in value.
- The loans' duration is very short, typically one day, whereas home loans can last for decades.
Federal Reserve Chairman Ben Bernanke hopes that banks will lower interest rates for retail and commercial borrowers. But because you and I are not large financial institutions, we will always pay more for our money than they do.
Bonus: Consumers can get zero-percent loans from auto financiers. Before you run to the dealership, make sure to run the numbers first. While it is true that you won't be making interest payments, you will inevitably pay a higher up-front price, which ends up earning the financier more, even in the long term.
Just remember — in the world of finance, there's no such thing as a free lunch.