One of the basic functions of the U.S. Federal Reserve is to stabilize the economy. To achieve this, it raises and lowers the federal funds rate in correspondence with the inflation levels. For instance, the COVID-19 recession led to a significant decrease in the inflation levels in the U.S. More specifically, the massive job losses, business closures, and a surge in prices resulted in reduced economic activity. To encourage spending, the Federal Reserve lowered the Fed Funds rate to around 0.25%. Since commercial banks borrow from the Federal Reserve, their lending interest rates also dropped significantly. Here’s some more information on the state of the interest rates on commercial loans.
The State of Commercial Loan Interest Rates
Thanks to the COVID-19 recession, the interest rates on commercial loans are currently low even after a slight increase in 2021. To give you an idea, most lenders are offering their loans at less than 4% interest rates. It is normal for lenders to lower their rates during a recession and raise them once the economy starts to recover. For instance, the 2008 Great Recession also caused interest rates on commercial loans to drop substantially. In 2018, the rates had started going up again until the COVID-19 pandemic hit in 2020 and brought them back down. By lowering the Fed Funds rate, the federal government encourages both entrepreneurs and consumers to borrow loans and finance their businesses or personal needs. This increases the purchasing power of consumers, which plays a great role in stabilizing the economy. For economic stability, the Federal Reserve targets interest rates ranging from 2.5% to 3%. Considering the current rates are around 0.25%, there is still a long way to go to stabilize the U.S. economy.
The Best Time to Refinance Your Commercial Loan
Although the Fed Funds rate is currently low, high chances are that the Federal Reserve will increase them soon. Considering the costs of manufacturing, transportation, retail, hotels, and other industries are still going up, the Federal Reserve may be forced to review the interest rates sooner than anticipated. Expert projections indicate that the Fed Funds rate, as well as interest rates on commercial loans, are more likely to go up in the next two years, provided inflation continues at the current pace. This means that the best time to refinance your commercial loan is now, especially if it will mature in the next two years.
Benefits of Refinancing Your Commercial Loan
In general, refinancing refers to replacing your loan with one that has more favorable terms, according to the Corporate Finance Institute (CFI). This is an ideal option if the interest rates on your current loan go down, monthly repayment amounts change, or the general terms of the loan become favorable. If you’re servicing a commercial loan with interest rates higher than what the market is offering today, you should consider refinancing it. This way, you will get to pay lower interest rates on your commercial loan. Additionally, you can borrow other commercial loans during this time, depending on your financial needs. Take note that it’s not clear when the Federal Reserve will increase their Fed Funds rate. Moreover, while the interest rates are low on commercial loans, lenders generally have more stringent loan underwriting measures to prevent massive borrowing.
Considering commercial loan interest rates may go up soon, now is probably a good time to borrow. To get started, search the internet for “commercial loans near me.” At Fidelity Mortgage Lenders, we can help you secure the right loan for your needs. To get started, call us at (800) 752-9533 today!
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