Adequate credit: The interest rate increase makes loans more expensive.

by Kimberly Nelson

 

Raised for the key interest rate for the dollarzone

Raised for the key interest rate for the dollarzone

As expected, the European Savings Bank raised the key interest rate for the dollarzone from 1.25 to 1.50 percent on Thursday. What puts savers in their hands presents borrowers with new challenges. The second increase in interest rates within a few months will, above all, make consumer loans and discretionary loans more expensive.

As a rule, banks convert interest rate steps of the FEG into their product portfolios within a few weeks. Bank customers should take a look at their account statement in the near future: interest rate increases on the credit line are communicated in this way. Framework loans – whether in combination with a credit card or not – could soon become more expensive.

Installment loans will also not be spared interest rate increases.

Installment loans will also not be spared interest rate increases.

However, the impact will be lower than for floating-rate loans with indefinite maturity. On the one hand, banks refinance installment loans, in part not via the money market and the central bank, but rather via the bond market. This applies even more, the longer the term of the loan. On the other hand, banks with a focus on price-sensitive customers (that is, the ones with the most favorable offers) will not, if possible, increase margins or only marginally. Otherwise they would have to fear for customers.

Experts expect the FEG to raise interest rates at least once again this year. Two interest rate hikes of 25 basis points each are still under discussion. The currency watchers are worried about the strong inflation in the usd area and give their control priority over economic problems in the usd periphery. It is extremely unlikely that the key interest rate will be lowered again at the present time. For this, the economic development should deteriorate strongly.

The increase in interest rates should serve as an opportunity to put all existing loan agreements on the test bench. In particular, credit facilities should be rescheduled promptly. Installment loans are often only half as expensive for customers with good credit ratings as bank overdrafts. Even with mediocre creditworthiness can save a lot of money.

The rescheduling of older installment loans – which were taken, for example, in the period from 2007 to mid-2008 – can now be reversed favorably. At that time, interest rates were significantly higher than today. In addition, borrowers for new loans now benefit from the Consumer Loan Directive, which came into force last year.

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