When to Get a Loan?

Lots of people, from the average consumer to the experienced investor, are curious about the best time to purchase bonds, apply for a car loan, or refinance a house. Many factors are involved in the process, but one of the main components is the current trend in interest rates. Here we will explore several examples of times when a consumer or investor should be aware of interest rate trends.

Housing prices suffered a lot during the year of 1980. Was excess speculation or massive leverage to blame for this? Actually, high interest rates caused by hyperinflation were the root of this problem. At that time, Paul Volcker was instrumental in raising rates more than once in order to deal with inflation. But while rates rose, the value of homes dropped dramatically. Values dropped because the prospect of borrowing money to finance a new home became less of a viable option for buyers as it became more expensive to acquire loans.

When interest rates increase many assets begin to lose their appeal. For example, if the cost of purchasing a new home or car doubles, most people are likely to decide against making the purchase at that time. Most of these values will decrease any time rates are increasing at a rapid pace. In the instance of bonds, the value decreases in correlation with an increase in rates. Conversely, when rates drop bonds will usually increase.

All of the factors mentioned above are good reasons for investors and consumers to follow interest rates. Where can these interest rates be found? And which rates are the most important to consider? Actual rates and charts of rates are available to view on sites such as Stockcharts, Bankrate, Bloomberg, and the Wall Street Journal; you can start checking on any one of these sites for current trends.

For an assessment of what the Federal Government is doing, check out the 90-Day Treasury Bill yields. It will make more sense to look at making purchases when the Treasury Bill yields have been decreasing. However, if Treasury Bill yields are increasing then it would be a good idea to either sell your home before rates get any higher, or put off any large purchases until rates have gone down or plateaued a bit.

The LIBOR interest rate is another one to watch. When looking at rates it is a good idea to consider LIBOR since so many consumer loans are associated with LIBOR. An average loan might involve the LIBOR plus 2 points, which means the loan’s interest rate will be LIBOR+2. On the other hand, it is not a good time to be buying if LIBOR trends are higher because money is then getting more expensive. Declining LIBOR indicates that your financing costs will be lower because money is getting cheaper.

Ideally, this information will be to your benefit. Knowing when to buy, sell, or maintain is easy to figure out when you are informed about the current interest rate trends. Why would you want to risk it when you can take a global view and be more certain of what the result will be?

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