Variable Rates
"Remember that old party game where revelers took turns
ducking under an ever-lowering bar? You may not have the
knees to be a limbo star, but when interest rates start
to tumble, you may ask yourself, 'how low can they go'?"
- Lorayne Fiorillo, author of
Financial Fitness in 45 Days
Rates that are tied to the prime lending rate or Treasury
Bill rate are called variable rates, because they vary depending
on the economy and subsequent interest rate moves by the Federal
Reserve.
The interest rate a bank or mortgage lender charges you for
a line of credit or loan is tied to the prime rate, which
it can't control. What the lender can control, however, is
the formula by which it determines the interest rates it will
charge or pay out to its customers-generally adding a certain
number of percentage points to the prime rate.
During the 90s, variable rates permeated the U.S. economy--a
good sign that the economy was growing at a healthy pace without
the risk of inflation.
|
