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Securing Funding As Interest Rates Increase

Travelers Today       By    David Thompson

Updated: Apr 27, 2022 03:27 PM EDT

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Securing Funding As Interest Rates Increase

(Photo: Sharon McCutcheon via Unsplash)

Understanding finance and loans is a complicated thing, but the one thing that needs to be understood best is what is the prime rate and how it can impact your loan options. Whether you're looking to buy a new car, secure financing for your business, or secure a home mortgage, one thing can affect your funding opportunities more than anything else. 

No, it's not your personal or business credit, though those factors matter. The one thing that matters more than anything is the prime interest rate. As the prime interest rate increases, securing funding in all forms will become more difficult in some cases and more expensive for all borrowers. Short for the United States Federal Reserve, the Fed is an independent regulator of American interest and securing loans. 

They affect policy, set the prime interest rates, and help set the course for the economic markets by increasing and decreasing the interest rates for borrowers. When interest rates increase, it becomes more competitive and more costly for borrowers versus when the rates are lower, which allows for less competitive terms and costs for borrowers. 

How The Prime Rate Affects Your Borrowing Opportunity 

So, for instance, you're looking to purchase your first house. When the prime rates are low, as they've been for the past few years, it's easier to get loans and terms that are more beneficial for the casual borrower. However, when the prime rate increases, it becomes more challenging to secure funding amounts, and the terms of paying those loans back become more expensive as well. 

What that means for the real estate market is that as those interest rates increase, there will be fewer buyers on the market than prior, slowing home sales and slowing appreciation of homes for sellers. But don't worry. Even if you're in the luxury market and looking at homes for sale in Laguna Beach and other highly desirable locations, the homes will still have a valuable market for the sellers. 

For borrowers in the average price range of homes, it will be slightly more expensive to secure funding than it was simply a few months ago. However, even with poor credit, mortgages are accessible. It just may be that you may need to pay more than previously as the borrower. 

Options For Borrowers With Subprime Credit

When borrowers have less than optimum credit, they are considered "subprime" borrowers. Typically lenders are less included to make loans to subprime borrowers, but that doesn't mean that financing will be impossible to secure. If you have poor credit, securing a loan is not impossible. But be prepared to pay more for the loan length than someone with better-to-outstanding credit would pay.

For alternative funding, first, consider credit donors. A credit donor is a service that secures loans, typically at prime interest rates under their credit, and repackages those loans to subprime borrowers, often at steep mark-ups. Another alternative lending option is with a credit broker. A credit broker is a service that works with banks to secure loans for individuals that otherwise may be excluded from the loan process.

Through microfinancing lenders, some lenders may package many smaller loans packaged into one larger loan. In that vein, you can take multiple smaller loans to aggregate to the loan amount you need. The downside of these types of loans is that you can owe a ton more if you fall behind on loan payments, as each loan may have a penalty of 2-5% when a debt payment is in arrears.

For prime borrowers, the increase in the prime rates doesn't impact their ability to secure funding, simply that the loan amounts they borrow will cost slightly more to repay. With increases in crime rates, finding loans and financing is more expensive and challenging to secure. That said, even with poor credit, there are alternatives to traditional banks and other lenders that will work with you. However, obtaining those loans may be at a much higher repayment cost.

As the Fed has made claims that they plan at least five more interest rate hikes this year, a borrower's best strategy is to act on securing financing sooner than later. Understanding that funding is more competitive with increasing the prime rate and repayment becomes more costly, especially for subprime borrowers. For those with the worst credit, traditional financing may be next to impossible, so finding alternative options may be the way to go.

See Now: The U.S. had the highest number of Most Wanted properties, dominating the Hotels.com Loved By Guests Awards 2018

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