Libor Loosens Up: Why You Should Care

The rate sways student, home equity, and small-business loans.

By SHARE

Libor—the London interbank rate—is on the decline, thanks to the government's rescue package. Translation: Rates for borrowing between banks are falling. Why should you care? Because many consumer loans are tied to it, including more than half of U.S. adjustable rate home loans. Many small-business, student, and auto loans and home-equity lines of credit also take their cues from Libor. The higher the rate, the tougher consumers have it.

Libor rates for three-month dollar loans are currently 4.55 percent, down from 4.64 percent on Monday. Some context: After the House of Representatives rejected the bailout bill at the end of September, Libor rates shot up to 6.88 percent, and a month ago, rates were less than 3 percent, according to the AP.

The current Libor rates are still at lofty levels, points out Felix Salmon of Portfolio.com's Market Movers blog: "The fact is that the credit market is a supertanker, based on trust, not speculation. As such, it takes a very long time to turn around, and I do have a feeling that the stock market is getting ahead of itself here."

What's the story with Libor? Pronounced LYE-bor, it's an interest rate set in London each business day. It's the rate at which banks lend to other banks that need temporary funds, by way of the London interbank market. This benchmark is significant because it represents the rate at which the world's most preferred borrowers are able to borrow money, and it's also a widely used reference point for short-term interest rates.

Says Zubin Jelveh of Portfolio.com's Odd Numbers blog: "It's surprising that Libor hasn't fallen more, largely because the FDIC has guaranteed interbank lending free of charge for the next 30 days."