Hi guys, can you please help me with this clarification. Recently I applied to a loan. They just informed me that they changed to the 3-month London Interbank Offered Rate (“LIBOR”) index instead of the Prime Rate index.
I’m very unsure of what the difference between these two are.
Does this mean a good thing or a bad thing? What are the finace charges for each.
Any sort of info will be of great help, thanks alot!
There are other terms of the loan you need to know about besides the index. But first, in terms of the index you are better off with the Prime Rate. The LIBOR is much more volatile, and that means you could be stuck with a high interest rate for several periods – rates are typically changed every six months.
You also need to know the margin – how much is added to the index to determine your actual interest rate. This is commonly expressed as an interest rate, and you want to have the lowest possible margin. For example, if the prime rate were 4.00% and your margin were 6.00%, your interest would be 10.00%.
You also need to know the caps. These are the maximum percentage increases that can be applied to your interest rate in any time period and the lifetime maximum interest rate. Typical caps are 2% points increase every six months and 6% lifetime caps.
There are other terms of the loan you need to know about besides the index. But first, in terms of the index you are better off with the Prime Rate. The LIBOR is much more volatile, and that means you could be stuck with a high interest rate for several periods – rates are typically changed every six months.
You also need to know the margin – how much is added to the index to determine your actual interest rate. This is commonly expressed as an interest rate, and you want to have the lowest possible margin. For example, if the prime rate were 4.00% and your margin were 6.00%, your interest would be 10.00%.
You also need to know the caps. These are the maximum percentage increases that can be applied to your interest rate in any time period and the lifetime maximum interest rate. Typical caps are 2% points increase every six months and 6% lifetime caps.
References :
http://www.bankrate.com/brm/ratewatch/leading-rates.asp