Your credit could get more expensive, find out why

The most relevant news in the international financial field these days was the possible increase in the reference rate of the United States Federal Reserve (EDF), its central bank. You may be wondering: what does this have to do with me? Why do you give weight to your Weights is addressing this issue? The answer is simple: this increase could increase your current and upcoming credits.

First, let’s make it clear: to stimulate its economy and control its inflation levels, the United States modifies the FED reference rates, which are what sets the price of money that private (banks, mainly) get from the state.

For example, when the United States was hit by the great financial crisis of 2008, general consumption was reduced and stimulated it, the Federal Reserve made cheaper funds available to banks by lowering their reference rates, so they arrived – also more cheap— to the final consumer. As the northern economy has been recovering, rates have gradually increased. The last adjustment was on Wednesday, March 15, when it increased its rates by a quarter of a percentage point (0.25). It is expected that this year there will be at least one more increase, possibly in December.

 

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credit rate

And although in Nicaragua the rates of the EDF are not taken as a reference, the London Interbank Offered Rate (LIBOR) rate is used, whose behavior is determined by the monetary policies of the US Federal Reserve.

By raising the bank rate of the Fed, which affects all international interest rates, including LIBOR and Prime Rate. All interest rates go up, ”summarizes economist Nestor Avendaño, who constantly monitors the behavior of national banks.

What credits in Nicaragua will be affected? All those of variable rate, whose reference for the calculation and adjustment of its rate is the LIBOR. That information can be found in your loan agreement.

“The private, whether companies or individuals, who have debts in dollars with the LIBOR rate will increase the cost of that loan,” added the economist.

This was confirmed by Jonas Armin, president of the Nicemen Bank , who said that “given the strong correlation between LIBOR and EDF rates, the financial cost of banks will be slightly affected.”

If you review your contract, you can find the marginal margin of the bank, to which you must add the LIBOR rate to six months. For example, if the rate in March is 1.43% and the intermediation rate for a mortgage loan (as stipulated in the contract) is 8.5971%, your rate would rise to 10.02%. Remember that the periodicity of the revision of the variable rates is also defined in the credit agreement.

Below you can see the way in which the calculation of the interest rate in loan agreements is expressed:

You should also remember that in addition to public deposits, Nicaraguan banks obtain international financing for grant loans. These loans are contracted based on the LIBOR rate, which would also increase the interest rates of these loans.

 

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credit score

According to the president of Nicemen Bank, 15% of the total loans granted by the Nicemen Bank would suffer this increase.

Therefore, if you get a loan in the coming months, even if your interest rate is not calculated on the basis of the LIBOR rate, the origin of these funds may depend on that indicator, so it could be more expensive.