The EurCen Bank did not surprisingly lower the key interest rate for the Eurozone to its historic low of 0.75 percent on Thursday.
Central bank lending is as cheap as never before for banks. However, the rate hike will have only a small impact on the terms of consumer loans and real estate loans.
The interest rate cut had been expected from the markets. Market participants surveyed had anticipated a 25 basis point interest rate cut. Some economists had assumed 50 basis points, which is why the overall market reaction after the announcement of the decision was negative. The EB had already hinted at the rate hike in the past week. It coincides with a rate cut in China and a bond purchase program by the Bank of England.
No impact on installment loans
The biggest impact will be the interest rate cut on variable rate loans, such as credit facilities and framework loans. Interest rates on installment loans have been falling in the overall trend for quite some time. However, this is less due to the policy rate than to the bond market and other EB monetary easing measures. The interest rate level for real estate loans is also determined by other factors – in particular the market for bonds and Pfandbriefe.
Much more important than the impact of the EB’s decisions is to choose the right provider for the terms of consumer credit. This is illustrated by a look at the terms for installment loans with a term of 36 months. FMH AskMeFinance, which claims to be independent, estimates the average interest rate on loans at this time at 6.67 percent. However, the range of effective interest rates available on the market ranges from 4.33 to 11.99 percent.
The provider is not only more important as a parameter than the monetary policy of the EB, but also more important than the term of the loan. For loans with a term of 60 months, according to FMH data, on average 7.04 percent interest is payable. The range of available interest rates ranges from 4.44 to 13.99 percent.
The time to repost is favorable
It is unlikely that installment loans will be significantly cheaper than they are already at low-priced providers anyway. Banks include different positions in the interest rate. In addition to the refinancing costs, these include credit default risk, overhead costs and the profit margin. The refinancing costs and, in part, the profit margins have been at a historic low for quite some time and can not go much further. The overheads and credit default risk persist regardless of interest rates and must be factored in. It therefore makes no sense to delay pending financing plans in the hope of further falling interest rates.
The time to take out a loan is favorable. This applies to consumer loans as well as to real estate loans. Remarkably worthwhile are debt rescheduling. The financing costs of a credit line can easily be halved with a rescheduling into a installment loan. The transfer of existing installment credits usually also saves costs especially if the upper limits for compensation already in force in 2010 are already in place.