Understanding What Determines Bank Rates
When people mention bank rates, they are usually talking about one of two things — the rates on loans, or the interest rates on deposit products. Although they are two different things because you will be making money with one and losing money with the other, the factors that determine bank rates are generally the same. Learning more about these factors and how you can track them on a regular basis will ultimately help you save money as you’ll know whether it’s a good time to save or spend.
Loan Rates
Loan rates from banks usually relate to the interest amount charged on any type of loan you could apply for at a bank. For example, you might be interested in a car loan, mortgage loan or even a bad credit personal loan. How exactly do banks determine the appropriate rate to charge customers?
All banks set their interest rates based on what other banks are charging in interest. Banks know that their customers will simply work with a competing bank if their rates are much lower, so they all must be within range of each other. Also, banks themselves borrow money from the Federal Bank which also charges the banks themselves for borrowing money for their operations. If the central bank charges high rates then banks will in turn begin charging higher rates to their customers.
During times of high borrowing, bank rates will be higher on loan products because people are rapidly decreasing the money supply. During recessions or other economical busts, interest rates will be kept low so that banks can loan at a low rate to reduce the money supply. A balance must always be kept to maintain a healthy economy.
Deposit Interest Rates
Deposit interest rates are the types of rates that everyone likes to talk about because it means you’ll be making money based on the type of product you select or how much you’re investing. Bank rates will vary on your deposit and the different products you can choose from like CDs, money market accounts and high yield savings or checking accounts.
Generally speaking, credit unions offer higher rates than banks because credit unions are usually established to help members of a specific community versus making a profit. For this reason, they are likely to charge lower loan rates as well. Banks give interest based on how much their competitors are offering. They will often run promotions and offer higher deposit rates when they are trying to attract new business or to promote a new bank product. Either way, all interest is good interest.
Longer term deposits and higher deposit amounts will both usually net you higher interest returns. This is because banks have more time and flexibility to make money with your deposit, so they are willing to reward you accordingly.
Now that you know how bank rates are determined for both loans and deposit products, you can take out a loan when interest rates are depressed and deposit money when you can get the most for your money. Paying attention to the Federal Reserve’s interest rate cuts or hikes can also be beneficial.