After today’s 0.25% increase in the target range for the Fed Funds Rate, banks increased their Prime Rates with a corresponding increase from 8.00% to 8.25%. These changes are effective for most banks tomorrow May 4, 2023.
In addition to interest rate increases for commercial loans and credit cards, expect rate increases in many consumer loans which are based upon the Prime Rate – for instance home equity loans, home equity lines of credit (HELOCs), car loans, and personal loans. All of this leads to overall higher borrowing costs, reduced disposable income, and slower economic growth.
A higher prime rate can have several effects on consumers, including:
- Higher interest rates on loans: The prime rate is used as a benchmark for many loans, such as variable-rate mortgages, home equity lines of credit, and personal loans. When the prime rate goes up, these loans become more expensive, as the interest rate charged on them increases. This means that consumers will have to pay more in interest charges on their outstanding loans.
- Higher credit card interest rates: Credit card interest rates are often tied to the prime rate. When the prime rate goes up, so do credit card interest rates. This means that consumers will have to pay more in interest charges on their credit card balances.
- Higher borrowing costs: Higher prime rates can make it more expensive for consumers to borrow money. This can lead to reduced demand for loans and credit, which can slow down economic activity.
- Reduced disposable income: When borrowing costs go up, consumers have less money available for other expenses. This can lead to reduced disposable income, which can lead to reduced spending and slower economic growth.
- Higher mortgage payments: If you have a variable-rate mortgage, a higher prime rate can lead to higher monthly mortgage payments. This can put a strain on your budget and make it more difficult to make ends meet.