Bank Loan Rates
Understanding bank loan rates, which can sometimes be confusing, is essential before attempting to take out a loan. Whether trying to purchase a house for the first time or attempting to secure monies for a vehicle, one should always do his homework before meeting with officers of the lending institution. And while it may be easy to be caught up in the excitement of making a purchase, ensuring that the terms are clear and understandable is protection from being disappointed or surprised later by increased percentage rates or higher payments due. Several factors can affect the bank loan rates a person is able to get. Knowing what can affect someone's chances of obtaining competitive rates is the first step in being an informed and ultimately satisfied consumer.
The terminology associated with taking out a mortgage, or securing another type of loan, is often difficult to understand. This is why researching and familiarizing oneself with the various nuances of the industry is vital before even attempting to contact a bank about obtaining financing for a project. There are many factors that contribute to the final bank loan rates that a customer is offered. The amount of money being borrowed, for example, can play a role in whether a percentage is low or high. Added to this is the fact that paying a sizeable down payment, thus decreasing the amount necessary to be borrowed, can be to the benefit of the consumer, ultimately contributing to lower costs in the long run. In addition, when trying to figure what the ultimate cost will be, the term of the loan must also be taken into account.
These factors are all important when coming to the point of committing to borrowing a large sum of money. But perhaps the most important terms to understand in regards to bank loan rates are fixed versus variable APRs, or annual percentage rate. Each person must weigh the pros and cons of either option, understanding that depending on one's financial situation, one course will probably be preferable to another. There is no right or wrong choice when deciding between the two. As with nearly everything, however, comprehending how outside forces, even those beyond the control of the borrower, can affect the amount of money one has to pay is essential.
For those bank loan rates that are fixed, the borrower never has to worry that sometime, during the course of the loan, the interest rate will drop or increase. The appeal of this particular type of APR is obvious. Knowing with certainty that one's payments would never increase is comforting and enables an individual to budget more effectively. While this also means that the rate will never drop, as sometimes happens with those who have variable rates, many would choose to forgo that potential benefit in favor of stability. Many may wonder then, "Why doesn't everyone choose to go with a fixed APR?" Unfortunately, there is a downside that some are unable to reconcile with the benefits; typically, people who make the decision to have a fixed percentage due find that they are paying a higher percentage from the beginning. This, of course, equates to higher monthly payments, something that may be out of the price range for many.
The upfront higher costs of bank loan rates that are fixed are what drive many to accepting a mortgage with a variable APR. These types of loans have come under much scrutiny recently because of the recent boom of foreclosures and people unable to make their house payments. Initially, perhaps, there is difficulty finding a drawback with variable APRs; on paper, the payments are lower, and the possibility of dropping rates lures many into making decisions that they later regret. Depending on the state of the economy, rates may fall, or more likely, increase without much warning. Home owners have found themselves owing payments that are drastically higher than expected and then finding that they are unable to pay, contributing to the number of defaulted mortgages. Since it is impossible to know, from one quarter to the next, what the rate may end up being, these loans should be pursued with caution. As long as the consumer is aware of the potential variation, however, and has planned for hard times, weathering the increases is possible.
Another thing to consider when trying to decipher bank loan rates is how a person's credit affects the terms of the loan. Obviously, the better one's credit history, the easier obtaining low rates will be. The credit history and score are impacted by several different things: the length of a person's credit history, the ratio of debt to income, and the number of delinquent accounts, if any. For those in the market to borrow money, making sure that their credit is in its best possible shape is a good place to begin; spending some time repairing any negative marks may help a person save thousands of dollars over the course of the time they are having to finance something. Although, obtaining a monetary advance is possible even with less than perfect credit, one can assume he would not be getting the best possible deal.
Even after figuring out the various nuances and nature of bank loan rates, a person must still proceed with caution. Borrowing money is a big commitment and, as such, should be thoughtfully considered and not rushed. Having debt and owing money to a lending institution can be a way to further one's dream or can ultimately end up being a detriment. "The rich ruleth over the poor, and the borrower is servant to the lender." (Proverbs 22:7). As long as a person is wise, however, and aware of his own capabilities, especially his ability to repay what he has borrowed, there is no reason that the experience has to be a negative one. Rather, it can be a way to establish oneself, acquiring items like a home or car that might have otherwise been out of reach.
Bank Money Market RateA bank money market rate is the interest that financial institutions pay to account holders of money market funds (MMFs). This type of investment account offers the advantages of both a savings and a checking account, though with certain federal limitations and restrictions. Obviously, a savings account earns a certain amount of interest, albeit a very small percentage. But investors accept the small return because the savings account has the advantage of high level of accessibility and liquidity. That's the economic term for how easily an investment product can be turned into cash. (In contrast, a house has very low liquidity because it's time-consuming to sell and then receive its cash value, hence the old saying, "house-rich and cash-poor.") The funds in a checking account may or may not earn interest, depending on the particular banking company, but here again the cash is easily accessible and liquid. The account-holder accesses the cash just by writing a check. A bank money market rate is usually at least slightly higher than that for a savings account, and the MMF account-holder also has check-writing privileges so the cash is readily accessible. However, federal regulations restrict the number of checks per month that can be written on this type of account. If the individual writes more checks than is allowed, the institution will deduct a fee from the account's balance. Therefore, the trade-off for the slightly higher interest on an MMF is slightly less accessibility and liquidity. Additionally, the banking institution may require a minimum deposit to open these types of accounts. For example, a new account-holder may need to deposit $1,000.
Even though the bank money market rate is small, MMFs are attractive to account-holders who want higher interest than what they would get from a typical savings account. The apostle Matthew records a time when Jesus told his followers a story about a servant who buried the coins entrusted in his care because he was afraid of risk. The master was angry, upon his return, to learn what the servant had done. He said, "Thou oughtest therefore to have put my money to the exchangers, and then at my coming I should have received mine own with usury" (Matthew 25:27). In other words, if the servant had invested the coins instead of burying them, the master would have received interest on the investment. Money market funds are a comparatively safe investment, though the bank money market rate may be less than other safe choices such as certificates of deposit and Treasury bills. However, certificates of deposit and Treasury bills are not as liquid. Though these types of investments also have minimum deposit requirements, the cash is much less accessible. For example, certificates of deposit usually are for certain terms, such as six months, a year, or even longer. Heavy penalties are incurred when the funds are withdrawn before the end of the term. These are safe investments for long term needs, but not when liquidity is important to the investor.
Individual investors are not the only ones to save their cash in MMF accounts. Large nonprofit institutions, such as hospitals and universities, often have cash that needs to be invested. If the funds won't be needed for several years, the financial administrators may choose to invest in certificates of deposit or Treasury bills. But when a short-term investment is required in other words, when the cash will be needed in a few months it may be invested in MMFs. The bank money market rate will probably not be as much as could be earned by investing in a certificate of deposit or Treasury bill, but the cash will be more easily accessible. The financial administrators make the conscious decision to trade a percentage point or two in interest earnings for increased liquidity. Of course, for profit corporations also invest in these types of funds when the cash is being held to achieve short-term goals. Obviously, receiving any amount of interest on cash is better than getting none.
Financial institutions offering MMFs as investment opportunities pool them all together and lend the money at a higher bank money market rate than is being paid to the investors. The difference between what banks receive in interest payments and what is paid out to account-holders is what provides these institutions with the profit to pay for capital and operating expenses, such as bank branches, employee salaries, innovative technology, and security. These profits may also be invested in certain (and hopefully wise) investment opportunities. The deposits in money market accounts, as in savings and checking accounts, are protected by the Federal Deposit Insurance Corporation (FDIC) for up to $100,000. This federal protection is another advantage to having short term cash deposited in these types of investments.
Potential investors have the opportunity, courtesy of internet technology, to locate a financial institution that offers a competitive bank money market rate on its MMFs. Innovative software applications allow investors to make secure deposits even with financial institutions far from their own geographical location. Before opening an MMF account, however, prospective investors should request information regarding interest rates, fees, and account requirements. For example, the investor will want to know the minimum required deposit and the fees for exceeding the check-writing restriction. The financial institution may offer a tiered schedule for interest. This means that higher balances in an MMF may earn a higher bank money market rate than lower balances. The investor will also want to know how the interest is calculated and when the amount is added to the account. For example, many institutions deposit the earned interest on an MMF once a month. Investors will not realize the gains from comparatively safe investment vehicles as they may from the riskier stock market, but neither will they experience the losses. Where the money in a stock market portfolio will fluctuate, the money in an MMF will slowly increase as interest is added to the account. The principal, which is the original amount invested, stays safe and secure. When safety, liquidity, and accessibility are important investment concerns, then investors are wise to seek out a competitive money market fund.