The Impact of LIBOR Rates on Personal Finance

By Stock Research Pro • June 14th, 2009

LIBOR, the London Interbank Offered Rate, is the most active interest rate market in the world. The LIBOR is fixed on a daily basis by the British Bankers’ Association and serves as a widely used short-term interest rate benchmark. LIBOR is designed to indicate the cost of borrowing between the world’s largest and most reputable banks and given London’s financial prominence, LIBOR applies to all major currencies, including the Pound Sterling, the U.S. Dollar, the Japanese Yen, and the Swiss Franc.

How is LIBOR Determined?

Every morning at 11:00am London time, a department of the British Bankers Association determines LIBOR by averaging the inter-bank interest rates offered by its members. To perform the calculations, data from sixteen banking organizations is used based on interbank rates. The data from these organizations is combined and averaged to arrive at the daily LIBOR rate. The calculations for LIBOR are for periods as short as overnight and as long as one year.

Current LIBOR Rates

Why is LIBOR Important?

LIBOR not only provides information regarding the cost of borrowing, it actually influences it. All around the world, LIBOR is used to provide the basis for other interest rates.

Some of the areas of personal finance that LIBOR may impact include:

• Corporate Loans
• Mortgage Loans
• Automobile Loans
• Student Loans

Most adjustable rate mortgages and credit card interest rates are tied to LIBOR. As rates change, a higher LIBOR will increase the monthly payment.

LIBOR v. the Prime Rate

LIBOR and the US Prime Rate both represent benchmark interest rates and both rates are used as references rates for a variety of lending transactions. One of the primary differences between the two is that where LIBOR is a floating rate (fluctuating constantly) the U.S. Prime Rate is a fixed rate, typically remaining unchanged for long periods of time. Where LIBOR is used by banks, the Prime Rate is used by consumers, representing the most attractive rates banks offer to their customers.

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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