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PatriciaM3_A1 Interest rates DiscussionGeneral Education Mathe.docx
- 1. Patricia M3_A1 Interest rates Discussion General Education Mathematics MAT109 Professor Mary Troy Okay despite the great example provided by Professor Troy, I am still a bit apprehensive about my understanding of what is expected in this week’s discussion assignment, so I hope it is understandable and correct. I. How is consumer debt different today than in the past? According to a couple of different articles that I read, and the U.S. Federal reserve website U.S. Debt is at an all-time high. In the article posted on Time.com titled “Overall debt levels rose at the fastest rates seen since 2007, according to a new study by the Federal Reserve of New York” this article states that “within the last three months of 2013 U.S. debt had an increase of 2.1% this is said to be the highest rate of increase since 2011 and this debt includes mortgages, auto loans, student loans, and credit card debt” (Frizell, 2014). This information makes me wonder what is contributing to this rise in debt across America, is it due to an increase in unemployment, or a lack of financial common sense. Not that I am one to talk about others debt being that I have a car loan, a mortgage, and of course student loans, but I have taken pride in making certain that my debts have achievable end dates in fact my mortgage and car loan currently only have 3 ½ years left. I do admit I have a credit card, however it is for emergencies only and thankfully there have been no big emergencies that have required its use, I guess I just have a hard time understanding how our nation can possibly get so far into debt with little hope of paying it back. And I think I have got a bit off track here so let’s move on. *After the references I have included the table that I found from the Federal Reserve. II. What role do interest rates play in mounting consumer debt?
- 2. This is another are I am out of my depths in and so I am going to wing it a bit. I suppose that when a credit card company offers a consumer a credit card with and initial low interest rate it draws them in and once they end up in over their heads the interest rate increases making it difficult to pay back the amount that has been put onto the credit card. This I think puts the consumer in a place where they are getting deeper and deeper into debt, while the credit card companies make more income. I suppose another way this could be said is that while interest rates are low people are more likely to take out loans because they will have less interest to pay back this can be very appealing to someone who is looking to purchase a home, a car, to get a student loan, or to get a credit card so that they can buy things that they otherwise couldn’t afford to buy. Unfortunately rates don’t always stay low and that is where the consumer tends to get into trouble. So that bring me to the effect that all of this debt can have on the economy, when people borrow more and more from banks especially in times of poor economic conditions this can put a strain on the financial standing of the bank, and even though the consumer often makes payment on said debts we can’t always foresee potential hazards such as job loss which makes paying back our loans difficult if not impossible. When backs are holding loans which are in default they are losing money, and when banks are losing money it makes giving loans to others less likely thus restricting new business opportunities and so forth. III. What are the typical interest rates applied to credit cards mortgages, and other debt? In the case of interest rates it generally varies depending on the type of loan, whether it is a fixed rate, a variable rate, who is holding the loan etc. so let’s start looking at the various rates. Credit card rates- (CreditCards.com) Business credit cards- *
- 3. Card company Intro rate/time Average rate Credit requirements Capital One 0% for 6 months 12.9% - 22.9% Excellent credit/ Fair American Express 0% for 9 months 12.24% - 19.24% Excellent credit Bank of America 0% for 9 months 11.24% - 17.99% Variable Excellent credit Chase 0% for 12 months 13.24% - 15.24% Variable Excellent credit Citibank 0% for 6 months 15.24% Variable Excellent credit Student credit cards- * Card company Intro rate/time Average rate Credit requirements Discover 0% for 6 months 12.99% - 21.99 % Variable Fair Citi 0% for 7 months
- 4. 13.99% - 23.99% Variable Good Capital one N/A 19.8% Variable Average Bank of America 0% for 15 months 10.99% - 20.99% Variable Good UPromise 0% for 12 months 12.99% - 20.99% Variable Good Travel/ Airline-* Card company Intro rate/time Average rate Credit requirements Capital One 0% for 12 months 11.9% - 20.9% Excellent / good Bank of America 0% for 12 Months 14.99% - 22.99% Excellent Chase N/A 15.99% Variable Excellent Citi N/A 13.99% - 21.99% Variable Excellent
- 5. Barclay 0% for 12 months 14.99% - 18.99% Variable Excellent Visa 0% for 12 months 14.99% Variable Excellent American Express N/A 15.24% - 19.24% Variable Excellent The Carnival 0% for 12 Months 13.99% - 20.99% Variable Excellent *these figures are an accumulation of each company and vary depending on card type Mortgage Rates- These rates vary depending on location, duration, down payment, credit score and type of loan. For this I used my location, with a loan amount of $165,000 with 20% down and a FICO of 740+. Fixed 10 Year 3.0%- 3.76% APR 15 Year 3.24%- 4.11% APR 20 Year 3.97%- 4.39% APR 30 Year 4.20% - 4.69% APR Arm 3/1
- 6. 2.77% - 2.89% 5/1 2.72% - 3.04% 7/1 2.92% - 3.16% 10/1 3.32% - 3.58% Auto Loans- New Car Used car 36 Months 2.34% - 4.99% 1.49% - 6.74% 48 Months 1.49%- 4.99% 1.99% - 4.30% 60 Months 1.99% - 5.24% 2.49% - 3.90% 72 Months 2.24% N/A There are a number of factors that can affect what kind of percentage rate one is able to get, so I guess I should go over those as well. 1.) Credit score and history, if you have a good credit score then you present less of a risk to banks which makes them more willing to lend to you with a lower rate and higher if your credit score is blemished. Things that can give you a bad score is if you have a tendency to pay bills late, bankruptcy, or you have no history at all. 2.) Down Payment, the more that you put down means you need to borrow less which leads to a lower interest rate.
- 7. 3.) Loan time frame, the less time that you have to borrow the money can give you a lower rate, plus less interest that you have to pay. 4.) Type of interest rate, fixed or variable makes a difference in the rate you receive. If you have a fixed rate then your rate stays the same, however if it is a variable rate then it is subject to change depending on the current market. 5.) Income, unfortunately the type of job that one has and how much money they make tends to be a determining factor in what type of interest rates that they may qualify for. There are other types of loans as well such as student loans and business loans which have varying interest rates depending on the type of loan as well as the current economic conditions. IV. Many of today’s interest rates are variable rather than fixed. What difference does that make to pension plans, housing loans, and other personal finances? In the case of variable versus fixed many choose the variable rate for loans because of the potential it has for lower interest rates, of course that also means that amount of your payments can vary. The way that a variable rate works is when the Prime rate drops so do the interest rates and vice versa. In the case of a fixed rate you have one set rat for the duration of your loan, and if you are lucky like I was you will find someone offering a lower rate. How a variable interest rate can affect pensions actually depends on whether you choose lifetime payment or lump sum payments when it comes time to retire as well as your age at the time of retirement. A pension plan is an investment which you pay into while working so that when you retire you are not broke. I think that the way a variable rate affects this is that when rates are low less is being credited to the pension plan and when they are high the more money gets credited. Of course I think that the interest rate also effect what you get out of your pension as well, however, I am probably way off on this subject.
- 8. References Amadeo, K. (2014). Average Consumer Debt Statistics and How It Affects the Economy. Retrieved March 26, 2014, from
- 9. http://useconomy.about.com/od/demand/a/Average-Consumer- Debt-Statistics.htm?p=1 Bankrate (n.d.). Auto Loan Rates in Portland, OR by Bankrate. Retrieved March 26, 2014, from http://www.bankrate.com/funnel/auto/auto- results.aspx?zip=97220&prods=73 CreditCards.com (n.d.). Airline Credit Cards & Frequent Flyer Miles - CreditCards.com. Retrieved March 26, 2014, from http://www.creditcards.com/airline-miles-page-2.php Federal Reserve (n.d.). FRB: G.19 Release-- Consumer Credit. Retrieved March 26, 2014, from http://www.federalreserve.gov/releases/g19/current/ FinAid (n.d.). FinAid | Loans | Private Student Loans. Retrieved March 26, 2014, from http://www.finaid.org/loans/privatestudentloans.phtml Franklin, M. B. (2008, March). Pension Payouts Are Shrinking- Kiplinger. Retrieved March 26, 2014, from http://www.kiplinger.com/article/retirement/T037-C000-S002- pension-payouts-are-shrinking.html Frizell, S. (2014, February 19). Americans? Personal Debt Levels Increasing At Rapid Rate: Fed Reserve - TIME. Retrieved March 26, 2014, from http://time.com/8740/federal- reserve-debt-bankrate-consumers-credit-card/ Fuscaldo, D. (2011, December 21). Adjustable Rate Mortgages: Do They Ever Make Sense? | Fox Business. Retrieved March 26, 2014, from http://www.foxbusiness.com/personal- finance/2011/12/21/adjustable-rate-mortgages-do-ever-make- sense/ Hewitt, J. (n.d.). About Pension Annuity Rates | eHow. Retrieved March 26, 2014, from http://www.ehow.com/about_4622940_pension-annuity- rates.html Investopedia (n.d.). Variable Interest Rate Definition | Investopedia. Retrieved March 26, 2014, from http://www.investopedia.com/terms/v/variableinterestrate.asp Money Economics (n.d.). Beginner?s Guide to Debt Interest
- 10. Rates - Money Economics. Retrieved March 26, 2014, from http://www.moneyeconomics.com/financial-guides/debt- management/beginners-guide-to-debt-interest-rates/ Pimco (n.d.). PIMCO | In Depth - The Upside of Low Interest Rates for Pension Plans: Issuing Debt to Fund Pension Liabilities. Retrieved March 26, 2014, from http://www.pimco.com/EN/Insights/Pages/The-Upside-of-Low- Interest-Rates-for-Pension-Plans-Issuing-Debt-to-Fund-Pension- Liabilities.aspx Singer, M. C. (2012, December 7). U.S. Consumer Debt Hits All-Time High: Borrowing Rises To $2.7 Trillion. Retrieved March 26, 2014, from http://www.huffingtonpost.com/2012/12/07/us-consumer-debt- record_n_2260457.html?view=print&comm_ref=false Stern, D. (2014, February 19). Consumer Credit Advantages and Disadvantages | LIVESTRONG.COM. Retrieved March 26, 2014, from http://www.livestrong.com/article/68036-consumer- credit-advantages-disadvantages/ Figure 1: Table from http://www.federalreserve.gov/releases/g19/current/ showing
- 11. the debt trends of American’s from 2009 to present. consumer Credit Outstanding (Levels) 1 (Billions of dollars) Not seasonally adjusted Year Quarter Month 2012 2013 2014 2009 2010 2011 2012 2013r Q4 Q1 Q2 Q3 Q4r Novr Decr Janp Total 2,553.5 2,648.1 2,757.0 2,924.3 3,098.6 2,924.3 2,924.4 2,967.7 3,038.8
- 12. 3,098.6 3,064.8 3,098.6 3,110.3 Major holders Depository institutions 906.3 1,185.5 1,192.6 1,218.6 1,271.6 1,218.6 1,191.3 1,211.5 1,231.5 1,271.6 1,246.7 1,271.6 1,257.2 Finance companies 471.9 705.0 687.6 679.8 679.0 679.8 671.3 674.6 678.5 679.0 677.8 679.0 674.7 Credit unions 237.1
- 13. 226.5 223.0 243.6 265.0 243.6 245.5 253.1 261.9 265.0 263.8 265.0 267.1 Federal government 7 223.1 356.2 484.7 616.8 729.8 616.8 659.5 674.6 713.5 729.8 724.4 729.8 757.8 Nonprofit and educational institutions 8 88.8 78.4 74.5 67.1 61.7 67.1 65.0 63.8 62.6
- 14. 61.7 62.1 61.7 61.3 Nonfinancial business 45.0 46.2 48.5 48.5 43.1 48.5 42.0 42.0 42.6 43.1 42.6 43.1 43.0 Pools of securitized assets9,10 572.5 50.3 46.2 49.9 48.6 49.9 49.8 48.0 48.4 48.6 47.3 48.6 49.2 Major types of credit, by holder Revolving 917.2
- 16. 67.1 66.6 67.1 64.7 Credit unions 35.4 36.3 37.9 38.9 43.0 38.9 39.4 40.1 41.1 43.0 41.7 43.0 42.3 Federal government 7 ... ... ... ... ... ... ... ... ... ... ... ... ... Nonprofit and educational institutions 8 ... ... ...
- 17. ... ... ... ... ... ... ... ... ... ... Nonfinancial business 27.6 26.8 27.9 27.9 22.5 27.9 21.4 21.6 21.7 22.5 21.9 22.5 21.9 Pools of securitized assets9,10 441.9 31.4 29.8 31.2 30.6 31.2 31.6 30.1 29.8 30.6 29.5
- 19. 608.4 604.3 607.0 611.5 611.9 611.2 611.9 610.0 Credit unions 201.7 190.1 185.1 204.8 222.0 204.8 206.2 213.0 220.8 222.0 222.1 222.0 224.8 Federal government 7 223.1 356.2 484.7 616.8 729.8 616.8 659.5 674.6 713.5 729.8 724.4 729.8 757.8
- 20. Nonprofit and educational institutions 8 88.8 78.4 74.5 67.1 61.7 67.1 65.0 63.8 62.6 61.7 62.1 61.7 61.3 Nonfinancial business 17.3 19.4 20.6 20.6 20.6 20.6 20.6 20.5 20.9 20.6 20.7 20.6 21.0 Pools of securitized assets9,10 130.5 19.0 16.4 18.7 18.0 18.7 18.3
- 21. 17.9 18.6 18.0 17.8 18.0 17.6 Memo Student Loans 11 831.6 912.4 1,012.3 1,131.3 1,225.6 1,131.3 1,168.9 1,178.6 1,213.0 1,225.6 n.a. 1,225.6 n.a. Motor Vehicle Loans 12 718.9 712.9 750.7 808.5 874.9 808.5 820.4 840.6 866.0 874.9 n.a. 874.9 n.a.
- 22. Back to top Consumer Credit Outstanding (Flows) 1 (Billions of dollars; annual rate) Not seasonally adjusted Year Quarter Month 2012 2013 2014 2009 2010 2011 2012 2013r Q4 Q1 Q2 Q3r Q4r Novr Decr Janp Total -103.7 -25.3 108.9 169.4 174.3 259.9 0.4 173.3
- 23. 284.4 239.3 172.5 406.6 139.4 Major holders Depository institutions -64.5 -70.3 7.1 28.1 52.9 130.0 -109.5 81.0 79.8 160.4 116.2 299.0 -172.3 Finance companies -82.4 -13.4 -17.4 -7.8 -0.8 12.6 -34.0 13.2 15.5 2.0 -16.8 14.4 -50.9 Credit unions
- 24. 0.9 -10.7 -3.4 20.6 21.3 27.9 7.6 30.4 34.9 12.3 7.9 13.3 25.7 Federal government 7 87.9 133.1 128.5 132.1 113.1 80.6 171.1 60.1 155.6 65.5 70.5 64.9 336.0 Nonprofit and educational institutions 8 -5.8 -10.4 -3.9 -7.4 -5.4 -1.8 -8.6 -4.5
- 25. -4.7 -3.7 -1.2 -5.0 -5.5 Nonfinancial business -3.9 -2.5 2.3 0.0 -5.4 2.8 -26.1 0.3 2.0 2.0 1.8 5.5 -1.3 Pools of securitized assets 9,10 -37.8 -42.3 -4.2 3.7 -1.3 7.8 -0.1 -7.2 1.3 0.8 -6.0 14.5 7.5 Major types of credit, by holder Revolving
- 27. -2.7 0.7 2.3 6.1 -28.2 Credit unions 2.0 0.9 1.6 0.9 4.1 3.0 2.0 3.0 3.9 7.4 6.6 15.1 -7.4 Federal government 7 ... ... ... ... ... ... ... ... ... ... ... ... ... Nonprofit and educational institutions 8 ... ...
- 28. ... ... ... ... ... ... ... ... ... ... ... Nonfinancial business -2.1 -4.6 1.1 0.0 -5.4 3.8 -26.1 0.8 0.4 3.1 3.0 6.9 -6.1 Pools of securitized assets 9,10 -8.0 -31.9 -1.6 1.4 -0.6 6.2 1.6 -5.8 -1.6 3.3
- 30. 3.5 6.3 -16.4 10.7 18.2 1.4 -19.1 8.3 -22.7 Credit unions -1.1 -11.6 -5.0 19.7 17.2 24.9 5.6 27.4 31.1 4.9 1.4 -1.8 33.2 Federal government 7 87.9 133.1 128.5 132.1 113.1 80.6 171.1 60.1 155.6 65.5 70.5 64.9
- 31. 336.0 Nonprofit and educational institutions 8 -5.8 -10.4 -3.9 -7.4 -5.4 -1.8 -8.6 -4.5 -4.7 -3.7 -1.2 -5.0 -5.5 Nonfinancial business -1.9 2.1 1.2 0.0 0.0 -1.1 -0.1 -0.5 1.6 -1.1 -1.2 -1.4 4.9 Pools of securitized assets 9,10 -29.7 -10.4 -2.6 2.3 -0.7 1.6
- 32. -1.7 -1.4 2.8 -2.6 -4.9 1.6 -4.9 Memo Student Loans 11 101.0 80.8 99.9 119.0 94.3 66.0 150.3 38.7 137.6 50.8 n.a. 50.8 n.a. Motor Vehicle Loans 12 -58.2 -41.0 17.2 59.8 66.4 41.0 47.6 80.7 101.7 35.8 n.a. 35.8
- 33. n.a.