If you have a significant amount of debt, or are looking to borrow again sometime soon, you may be asking yourself this valuable question: when will prime rate finally go down again? Since it can have a big impact on your budget, it’s smart to know the factors that go into deciding the prime rate. It’s historically a somewhat nuanced number that isn’t always easily understood, but it is something on which most everyone has an opinion.
Before you bemoan the current state of the rate, take a quick read through the basics, along with what experts predict in the years ahead for the prime rate.
What is the Prime Rate?
Before the system we have now, “prime rate” used to the same as the “interest rate.” It’s now its own number based on the Federal Reserve’s benchmark interest rate. As you might recall, the Fed bumped up rates last December, which forced the prime rate to its new high of 5.50%. This means that any short term loan you take out will be at least 5.50%, but certain financial products – such as credit cards – will be much more than that. The new average for card APR is hovering right around 17 – 18%.
(Long term loans, such as mortgages, follow their own rules. They are usually lower than prime rate for the most qualified borrowers.)
What Does It Mean for Businesses?
There are quite a few ways that a rise in the prime rate affects a company. On the upside, it brings back guaranteed larger returns for some types of fixed investment vehicles, like CDs and other savings accounts. Since a jump in rates – even just a little – will create a higher Annual Percentage Yield (APY), you’ll feel it positively if you’ve invested.
The downside to the rate going up is that borrowers will now pay more. Your APR on any credit card or variable rate loan will bump up a little. This can usually happen right away, with banks notifying their customers the same week or even month about increases in interest rates. (Note that this bump in interest is separate from any other interest rate increases, such as penalty rates paid for being late with payments or going over your credit limit.) Fixed-rate loans shouldn’t be affected, provided the contract states the APR is static.
Realistically, you should see the rates on business credit cards and loans that you may be considering applying for to be higher than they were before Prime Rate went up. Take a look at potential cards carefully, however, as the default rate may not be prominently displayed on marketing materials. Intro offers for lower rates are more likely to catch your eye, but once those promo periods are over, you’ll pay whatever the regular APR is on outstanding balances – a higher number now that prime has been increased.
Will It Go Down Again?
This is a tricky question. Last year brought about a steady raising of the rates from the Fed in the hopes that higher rates would result in some inflation. (Historically, we have been in somewhat of a slump in terms of inflation, and the rate boosts were a now-abandoned effort to manipulate the markets.) The Fed’s announcement that the rates won’t likely go up again for a while means that we may see a temporary end to prime’s continual increase. This does not, however, indicate a reversal in our future.
So, will prime go down? Kiplinger’s rate forecast spells out the possibilities, but no one but the Fed knows for sure, and even they aren’t particularly forthcoming about what things will finally look like at the end of this year. We do have a few key predictions:
- Fed won’t raise rates again in 2019, and the prime rate will stay steady.
- Some investors think Fed may cut rates this year, but it’s unlikely, as Fed Chairman boasted of economic gains and a strong market that wouldn’t require this action.
- Rates could go down in 2020. The soonest most experts agree a decrease could happen is next year, and that’s only if GDP growth slows from a predicted 2.5% this year to 1.8% next year. Strained China trade relations could hasten the decision, and a subsequent rate cut would result in lower prime rates on credit cards.
Why Operating Independent of the Prime Rate is Key
So, like most matters of money and markets, we don’t know anything for sure. A smart business owner won’t hang their hopes on the prime rate going up, down, or sideways and will instead look at their bigger overall debt portfolio. With prime rate changes affecting a very small amount of the monthly business budget, it’s wise to see the ways you can make bigger changes to the interest you pay or your overall debt load. Freeing up cash is a good idea, as well, so that you could even take advantage of higher rates with smart investments.
One savvy money move you can make at any time is to know your credit score. Getting the best rate available to you is more dependent on the actions you take and not the Fed. Do you pay on time? Can you transfer balances to reduce interest paid this year? Are you making the most out of perks such as cash-back offers and travel bonuses?
It’s likely that an overlooked benefit of your existing card will save you more money than a lower prime rate, and switching your business to a more competitive card is another option. These opportunities are only available to businesses with good credit, however, so give your credit profile some TLC. You’ll be ready for whatever the next Fed meeting throws at you.