Breaking News

Why are interest rates low in the US?

Global shares jump on hopes that US interest rates will stay low |  Coronavirus pandemic News | Al Jazeera

Borrowing and lending are some of the drivers of the US economy. People depend on loans to buy almost anything in the US market. From phones where manufactures have come up with friendly rates and business models allowing clients to pay in monthly installments to student loans which aim at helping students to clear their studies and repay afterward, there are plenty of reasons to borrow. The federal government has kept interest rates low compared to other countries. Borrowing in a US bank or credit union does not attract extremely high-interest rates. This is also the circumstance with peer-to-peer lenders as the government regulates them. There are many bodies that in place to protect users from fraud and exploitation in the US. The Federal Deposit Insurance Corporation protects depositors’ money in the American depository institutions. The National Credit Union Administration also protects depositors’ money. It is important that before borrowing, you look at company reviews to make sure you get a reputable company to offer you a loan.

Interest on loans in the US is known to be low. The Low-interest rates have encouraged people to borrow without fear of defaulting payment. But what makes interest rates to be that reasonable? Is it the government cushioning its citizens? Is it a way to get people to afford basic needs? Some factors affecting interest rates in the US are discussed below.

Credit risk
Credit risk is the biggest factor affecting interest rates in any country. Lenders look at this risk before they decide on the interest rate they’ll charge. When taking a personal loan, the lender will look at your credit score. If your credit score and financial history are good, you’ll get reasonable interest rates than those with a fair or bad credit score. It is the borrowers’ credit history that gives the lender confidence. The rate at which people default on loan payments in the US is significantly low, which explains the low-interest rates in the country.

Inflation
Inflation is the decrease in the purchasing power of money reflected in the increase in the prices of goods and services. Inflation determines how real and nominal interest rates work. When people buy treasury bonds, they expect they’ll get paid when their money will have increased in value. However, this is not always the case. At times the real rate they receive is less than the nominal or interest rate. Therefore, an investor will work out the expected inflation rate and separate the nominal and real interest rates. In the end, the investor will charge interest considering what they wish to make and the expected inflation rate. Future inflation is uncertain; one cannot be precisely right about it. Investors buy bonds and choose to bear the nominal risk. Someone has to pay it at the end of the day. However, they do it with the hope that inflation will not be terrible for them. 

Short term and Long-term bonds
Bonds are loans companies, or individuals give to the government. Short-term loans have a mature period of between one and three years. Short-term bonds are more liquid compared to long-term bonds. On the other hand, long-term bonds take up to 30 years to mature. When the term premium is low, or there is an anticipation that short-term rates will be low, the interest rates stay low. This is always tricky since the future is uncertain. Some models can be used to calculate the term premium. This model considers both inflation uncertainty and real rate uncertainty. 

Government policies
US government policies are fair to borrowers. The government is keen to protect its citizens by ensuring they don’t get exploited by lenders. The government does not charge high taxes on lending. This keeps the interest rates low. Government policies are also favorable to people who are planning to start businesses. A lot about money is uncertain, and particularly inflation rates are on the rise. The interest rate is still low, but rates may go up with the current expected inflation rate. Despite this, the government is trying to look into ways to see the interest rates do not go beyond unaffordable rates. 

In conclusion, while the US government is geared to ensuring interest rates remain low, it is important that you also take charge and  ensure you have a good credit score as an individual. If you got multiple debts, you can consolidate them and keep them manageable by paying a single loan. With good credit, history lenders will always give you favorable interest rates.