The Best Time to Get a Loan
Both consumers and investors at some point wonder ask the same question: when should I attempt to get a car loan, refinances my house, or purchase bonds? Although there are many variables involved in these decisions, the foremost factor to consider are the levels and overall trends in interest rates, and how they are effecting current values and prices. The following are some past instances in which it was beneficial to be aware of the trend in interest rates.
Back in 1980, prices in housing sustained some hard blows. Did the housing market suffer from massive leverage, or possibly excess speculation? The true reasons for the difficulty were actually to hyperinflation and the unreasonably high interest rates that resulted. In an effort to control the runaway inflation, Paul Volcker, head of the Fed at the time, raised the interest rates several times. However, home values quickly fell to new lows in response to these new higher rates. As it became riskier and more expensive to repay the higher interest rates on loans, many more people found the idea of borrowing money to purchase a home less than appealing.
For when interest rates are so high, the attraction in owning and maintaining such assets begins to fade. It is common sense that most consumer will be unlikely to want to buy a home or new car knowing that it will eventually cost them twice as much to finance. The normal pattern shows that once interest rates begin to climb, nearly everything else on the market stalls or starts to fall. Bonds are a perfect example; when rates go up, bonds will go down. In this symbiotic relationship, the opposite also applies. When bonds go up, interest rates will tend to fall.
For this reason, keeping a close eye on the behavior of interest rates is a wise course of action for potential investors. Where is the best place to find and observe these interest rate fluctuations? Which rates will give the most accurate picture of the trend? Many websites offer reliable interest rate statistics and even charts to help easily keep tabs on the up to the minute dominant directions of the trend, including Bankrate, Bloomberg, Stockcharts, or even the popular Wall Street Journal.
Also, for information regarding the status of the Fed, look to the 90 Day Treasury Bill yields. If you notice that the levels of Treasury Bills are getting lower, this tells you that money is becoming less expensive to obtain and that it may be an ideal time to make a large purchase. By the same token, you may want to be patient before making these purchases if you see the Treasury Bill yields rising. Furthermore, you may want to think about selling your home or other assets sooner, before the rates climb higher and it becomes more difficult to get the value you want for your sale.
LIBOR is another important interest rate you will want to take into consideration. Since LIBOR deals with a large volume of consumer loans, it can also be a reliable guage when tracking interest rates. A typical loan will look something like this: LIBOR rate +2. This means that the interest rate will be the standard LIBOR rate plus two points. From this, you can infer that because the LIBOR rates are higher, so are other rates, and that it would be unwise to be a buyer at this time. On the other hand, if the LIBOR is in decline, it translates into lower financing costs for a buyer’s market.
We do hope that sharing this knowledge will be helpful to you. When you have the tools to read the interest rate trend, you can use the information to be prepared to buy, sell, or just wait for the right opportunity. When you can reasonably predict what is going to happen, you can take the global macro view and use your knowledge to your best advantage.