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The federal reserve rate cuts might make you feel better about getting a loan, but for most people, the rate cuts do not dramatically impact consumer level loans.

Banks operate on a very thin margin between the Federal Reserve rate and the amount that borrowers pay to lend. If the banks are borrowing at 3%, the consumer will commonly receive a rate of 6% to 7% on a home loan. The difference is what the banks earn by borrowing low and lending high. Unfortunately, even when the Federal lending rates drop, banks are unlikely to continue lowering rates.

When you borrow from a bank with a fixed loan, you are practically getting money from a middle man. Although you may have borrowed at 7% on your home, the bank will often procure a loan from the Federal Reserve at 4%. The banks loan is locked in at 4%, just as yours is fixed to 7%. If rates were to skyrocket, you would get the same rate and the bank would still have a line of credit from the Fed at an equally lower rate.

Banks accept a high level of risk for their lending practices, which happens to be the primary why the rates are not dropping. If the bank is unable to collect money from the borrowers, it still has to make payments to the Federal Reserve for their loan. The banks like to have a comfortable margin to accept the risks of people going under. In effect, loans operate just like a insurance policy. The extra 3-4% over the Fed rate allows the bank to lend money while still staying profitable.

Just as gas prices are quickly to go up when wholesale prices go up, and slow to drop when the wholesale rate drops, banks operate in the same fashion. The extra that you pay protects them when people can no longer make payments. It is unfortunate, but the rate drops are more likely to help banks than they are to help consumers. At extremely low rates, banks would rather invest the money themselves in other things than give $100,000 to the average homeowner for a new home.

The price of gold is something that is highly debated by economists from varying schools of thought. The Austrian school of thought says that the value of gold is inherent and never changes, but that the value of fiat currency changes, and thus the price of gold. Other schools of economic thought argue that gold prices can go through boom bust periods, just like any other commodities. In history, the Austrian school of economics seems to win out.

The price of gold has been going up rapidly. Just a few years ago in 2003, the value of an ounce of gold was right around $270 per ounce. Fast forward to 2008 and the price of gold has quickly risen to $1000 per ounce, now down to the low $900s. This flee from fiat currency to gold has some investors worried that the world’s markets are about to enter a meltdown.

In the history of fiat currency, not a single one has lasted the test of time. Romans introduced the fiat currency, but after a series of wars and other large expenses, a loss of appetite for a fiat currency eventually fell to inflation. The problem with a fiat currency, Austrian economists argue, is that currency can be rapidly devalued due to inflation. The Romans did that, over history they clipped coins and printed currency that was not backed by anything of value. Because of this, historians warn, the world’s great empire faltered.

Now that gold prices are reaching their peaks there comes a new worry that inflation is rapidly devaluing the worlds currencies. The dollar has been devalued by over 97% in spending power since 1913, the year the Federal Reserve was created. Due to a larger money supply the market corrects itself with higher prices for goods.

The US Dollar has gone through some very important moments in history. In 1944 as WWII came to an end, the US Dollar was said to be as good as gold, thus the world placed their reserves in dollars rather than metals. By 1971, Nixon knew that the amount of gold would never cover the amount of dollars in circulation, thus the US went full-fledged fiat currency, no longer backed by any amount of gold.

The value of gold seems to be in a boom period for just the last 5 years after more than tripling in value. The expansion of credit during the 1990s and 2000s with the real estate boom boosted money supply and drove down the value of the dollar. Now that the dollar is no longer pegged to a specific value of metals, the price of gold floats with the amount of money in circulation.

Just in the last 6 months, the value of gold has risen from $600 per ounce to $1000. This gives us early warning signs that the amount of credit in the system is far too high and people are afraid to hold onto dollars. The money supply grew similarly today to how it did during the last Great Depression by doubling from 1920-1929 then dropping greatly from 1929-1933. Could it happen again? Austrian economists say yes.

Online banking is something that no one could have predicted. Now you are able to access your accounts at any time, make payments and see your statements from home without going to the local banking branch. Online-only banks have also sprung up with no actual branches, just a virtual account that promises higher savings rates and a slew of conveniences. For the average person, it would be perfectly acceptable to have both an online banking account and a brick and mortar bank.

Online banks generally have the best rates as they strive to cut costs by hiring a limited amount of workers (no tellers needed) and avoiding the costs of buildings, atms etc. The downside is a limited access to money and the inability to go to the bank and talk to a person if you need to. Most online banks will allow you to pay bills online, however, they do not offer easy withdrawals like the thousands of offline brick and mortar banks.

Brick and mortar banks are best for people who demand customer service. From the availability of many banking options, fee-free ATMs open 24/7 and the candy at the corner of the banking desk; brick and mortars have it all. They also have many costs that cut into savings rates, and make their lines of credit and loans more expensive. Brick and mortars offer a high level of comfort to customers, ensuring them that their money is right around the corner when they need it, rather than just a digital number on a computer screen.

Typically we would think of obtaining a loan from the friendly loan officer at the bank, rather than going to the general public for a loan. But new online lenders use eBay style bidding to allow people to get loans at rates they would have never previously received.

The old banking standard of using a credit score as a risk assessment hurts many new borrowers with healthy budgets but limited access to credit. Peer to peer lending is as easy as eBay, people bid on loans based on loan amount and interest rate, ultimately driving down the interest rate for the consumer.

This solution is great for both borrowers and investors. A borrower can get a 3 year, lower interest loan from thousands of people across Prosper.com who can lend as little as $25 per person. With a combined effort from the community, you can get access to a loan of up to $25,000 from people who are just like you. No need to go through the anxiety of heading off the to nearest corporate bank when there are thousands of people willing to help out in a time of need.

For investors, Prosper offers a great investment. A combination of investors spreads out risk and allows people to lend to more borrowers at one time. The creditworthiness of the borrower is shown next to their ID and many borrowers choose to open up their budgets to scrutiny. In most cases, it’s graduated college students who want to consolidate student debts and lower their interest rate.

Prosper.com manages all billing and credit bureau information. One payment is made to Prosper each month that is then distributed between all the investors. This style of lending lowers the closing costs and fees that comes with traditional borrowing and allows people to help others. The returns are rather splendid as well, as P2P lenders have some of the lowest delinquent repayments. Whether investor or borrower, there is a lot to gain from peer to peer lending.

Tax time is here and in full swing, and if you’re like the average consumer, you likely paid thousands in interest and other charges due to high debts.  Now there is a way to consolidate your debts into one low interest monthly payment and still be able to deduct the interest.

Home equity lines of credit (HELOC) have become very popular over the last decade thanks to the real estate boom.  A HELOC is a line of credit against the amount of value you own in your own home.  Thankfully, the government sees this just like a mortgage and will allow you to deduct your interest expense on your tax return. 

A home equity line of credit works just like a credit card, although this form of payment usually comes with checks rather than plastic.  A HELOC can be used to pay for almost anything your credit line will allow.  Many people have used them to improve their homes, add a pool, take vacations or even to buy groceries and pay monthly bills.  A HELOC provides the flexibility of a credit card with the low rates of a home equity loan.

How it works

A home equity line of credit is backed with the equity in your own home.  For homeowners who have been in their home for a long time, a high credit line HELOC should be easy to obtain.  Generally you can borrow up to 80% of the equity in your home.

Unlike a home equity loan, a line of credit can be used whenever you want, for whatever you want.  Most home equity loans are only for even dollar amounts and come with high closing costs and fees and cannot be changed or used at the borrowers convenience.  With the simple stroke of a pen,  a borrower can fill out a check to pay for virtually anything which will then be charged against the HELOC account.

HELOCs usually have much lower interest than credit cards and have become popular for eliminating credit card debt.  Many consolidation programs tout the easy credit lying in your own home as a way to pay off credit card debt in small monthly payments.  Unlike HELOC interest, credit card interest is not tax deductible.

Anyone with any equity in their home should apply for a HELOC just to have in case of emergency, debt consolidation or future use.  To consolidate debts, all a borrower has to do is write out a check for the amount of the debt and send it to their creditor.  The credit card debt will be removed an added to the HELOC debt. 

Interest deduction

Any debt can be put into a HELOC for interest deduction.  Credit card debt and personal loan debt is the best for consolidation because it is usually high interest and not tax deductible.  HELOCs have rates that are usually 8-10% lower than most credit cards, making them a bargain right from the start.  With a HELOC rate of 8%, the effective rate is dropped to 6% when you consider the tax breaks.   Anyone with high balances and high interest accounts should apply for a HELOC for instant debt consolidation.

Shopping around for the best interest rate can be a tedious task.  Minimum investments, investment periods and thousands of banks make shopping for a CD a difficult process. 

Stay away from corporate banking

Local for profit banks are generally the last place to look.  These banks are heavily taxed, unlike credit unions, and are out to profit, not benefit the members.  For profit banks usually have lower rates on CDs because they would rather borrow from the Reserve than from individuals.  For profit banks are also known for having significant fees for early withdrawal, and less options than credit unions.

Credit unions

Credit unions are the best place to check when considering in town banking and CD rates.  Credit unions are not for profit and look to serve members before making a profit.  Credit unions usually have favorable withdrawal policies and a plurality of plans spanning from monthly interest payments to compounding CDs.  If you want the high rates from someone in-town, a quick run to a local credit union is a great place to start.

Look online

For those willing to take the plunge with online banking, you will find the best CD rates from low-cost for-profit online banks.  These banks cut overhead by operating online and pass the savings to their customers and investors.  Online banks often use CD rates as a marketing tool and offer very high promotional and non-promotional rates designed to pull in new customers.  You might be able to find rates up to a full percentage point higher than off line banks. With this in mind you will incur some drawbacks such as overall convenience and limited access to your money.

Resources for finding the best rate

Websites such as Bankrate.com give a list of CD rates offered around the country.  The tech age has brought unforeseen competition in CD rates that has undoubtedly benefited the consumer.  The top yielding banks are ever changing, utilizing tactics such as adding .1% here and there to be listed as the #1 yielding bank.