What Causes Low Interest Rates?

The interest rate on a loan or credit card can hurt or help a consumer or business depending on how high it is. A low interest rate can provide thousands of dollars in savings and allow a consumer or business to repay a loan much quicker than a loan with a high interest rate. There are several causes of low interest rate in the United States. These reasons usually come down to economic stimulation.

Lack of Spending

In a bad economy consumers typically lower spending in an effort to conserve available cash. When consumers spend less, businesses bring in smaller revenues which can lead to a slowdown in multiple sectors including banking. If the economy isn't growing, very few loans are being created for projects like new buildings and large purchases like cars and homes. Banks and other lenders lower interest rates in these circumstances to entice consumers and businesses to spend more money by obtaining a loan. This can help stimulate the economy.

Fighting Inflation

The Federal Reserve controls the prime interest rate for the buying and selling of securities in the United States. Banks and other financial institutions across the country use this interest rate as a baseline for determining consumer and business interest rates for extensions of credit including home loans and business loans. This interest rate also influences stock and bond prices. The Federal Reserve may lower the prime interest rate if the Board of Governors believes doing so may help fight inflation; inflation is an increase in the cost of goods and services accompanied with a shortage in available capital. Keeping the prime interest rate low can help lower the overall cost associated with certain extensions of credit and keep inflation at bay.

Your Credit Score

Your credit score can allow you to obtain a loan or a credit card with a lower interest rate. This lower interest rate is extended to you because the bank or other lending institution sees you as a smaller financial risk as opposed to someone with a poor credit rating. A lower interest rate can save you thousands of dollars over the life of a given loan and allow you more financial flexibility in choosing the bank with the best lending conditions to meet your needs.

Monetary Policy

The Federal Reserve can also release more money into the economy as a means of keeping interest rates lower and providing more incentive for banks to create loans. When the the Federal Reserve "releases" money into the economy, they literally print new money and make it available to banks and other financial institutions. This is part of what is known as the Federal Reserve's "monetary policy" which is used to help promote economic goals on a national level.