Loans to Consumers and the Impact of Zero and Negative Interest Rate Policies

The loans for individuals and their families are often determined by interest rates. Many individuals are not really certain how interest rates are determined. Zero Interest Rate Policies (ZIRP) and negative interest rates can lower the cost of loans of all types, from home loans, car loans, student loans, credit cards and everything in between.

Modern Interest Rates Are Usually Determined by Central Banks

In pure capitalism, marketplace supply and demand determines interest rates. Since December 23, 1913, interest rates in the United States have been determined by its central bank, called the Federal Reserve (Fed). There are many ways for the Fed to determine national and even international monetary policy: by setting interbank loan rates, creating fractional reserve minimums and purchasing non-performing loans.

The United States is the sole superpower, and many other countries set their interest rates based on the US Fed’s actions. Payday loan interest rates will be adjusted when the Fed makes changes in its interest rates. Usually, the Fed lowers interest rates in order to spur more economic activity; it raises interest rates to curb inflation.

This “trickle down” monetary policy can act as a lever where a small adjustment can make a large transformation in global economics. While most nations have their own central banks, each is attempting to outmaneuver the others by offering more competitive, affordable goods for export or by attracting more foreign reserve currency for investments. Central banks might struggle to balance domestic and international policies.

More Nations Establishing ZIRP & Negative Interest Rates After 2008

In 2008, the world’s economic system faced a serious downturn due to the failure of sub-prime mortgages. In the previous decade, more homeowners had been able to qualify for mortgages. This created a great deal of wealth, including mortgage-backed securities (MBS) sold by banks all around the world.

Unfortunately, when the sub-prime market started to fail, it set off a domino effect. The Fed provided much-needed capital to save the global banking industry. Eventually, the Fed lowered interest rates so low that they were virtually nothing – Zero Interest Rate Policy (ZIRP) – in order to attempt to stimulate the economy.

Because interest rates are the “price of money,” the Zero Interest Rate Policy says that money is free. Of course, money is not free for the regular payday loan consumer or home owner, but the top banks have easy access to capital due to this “Quantitative Easing” policy.

Many nations followed the Federal Reserve’s lead in 2008 by developing their own ZIRP. Eventually, the next step was taken, and global central banks are now establishing “negative interest rates.” Sweden had reached this point in 2015, but when Japan lowered to negative interest rates on January 29, 2016, the move ended up “shocking” investors and economists.

Some financial experts see negative interest rates as a sign of desperation. Investors are basically being rewarded for taking out new loans. Individuals with savings accounts pay the financial institution for the service of holding their capital.

For decades, Japan has been trying to increase its productivity. Japan has one of the largest economies in the world; if they turned to negative interest rates, would the United States soon follow suit?

Central Banks Continue to Lower Interest Rates on Loans While Fed Increased Rates

While nations around the world continue to lower their interest rates, on December 16, 2015, the United States Fed raised short-term interest rates for the first time since the financial meltdown. Thus, while the United States Fed had been leading the world by determining global monetary policy, the fact that Japan was moving in the opposite direction was very interesting. Which nation was right?

The United States Federal Reserve had argued that unemployment rates were low and the economy had been improving. Monetary policy supports raising interest rates to prevent an economy from overheating.

No matter how one looks at it, interest rates are low, so it is a good time to borrow money. More financial information can be found on the Personal Money Store blog.

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