I am a relatively young, uninformed person who has never really had to finance anything but I am in the market for a new car. So my question is, what does the new interest cut do for me? I see that it is now down to 2.5% but I realize that I’ll never see that on a car loan. Is this a baseline from which longer term interest rates are determine? I guess I just don’t understand the way the financial system works.
Please enlighten me.
Thanks
The loan you get is the prime rate + <some number>, depending on many things. All else being equal, if the prime rate goes down 1/4%, the loan rates that you can get will go down a 1/4%. Those rates are derived through a torturous process from the prime rate.
The Federal Reserve Board uses interest rates to speed or slow economic growth with the idea that a slow, predictable pattern of growth is better than periods of very fast growth (with the inflation it normally brings) followed by periods of flat or negative growth (and the associated recession).
The theory behind the interest rate cuts is that it will boost the economy by increasing spending. Since borrowing becomes cheaper businesses can more easily expand. Bigger businesses means more jobs. More jobs means more people working. More people working means more spending. More spending means economic growth.
The same basic idea applies to individuals. More available jobs means more consumer confidence. More consumer confidence plus lower interest rates means more spending, especially on big ticket items like cars.
It’s really much more complicated than that, but it should give you the general idea.
The shorter-term a loan is, the more it’s affected by this.
Car loans, 4 or 5 years, will be affected somewhat, but the
loaner is also aware that the rate will not be this low for
4 or 5 years.
Credit card rates will be immediately affected.
30-year home loan rates will hardly be affected at all.