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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.

Your credit score is calculated by the amount of debt you have, the types of debt, how often you have paid your bills timely, how much new credit you have been seeking and how long you have had credit.

The largest portion, 35% of your score, is based solely on your payment history. If you have paid on time without being late on payments, chances are good that you will possess a good credit score. Lenders like to see that you can pay them back in a timely manner, thus they give lower rates to people with good credit.

The next 30% is based on how much money you owe, also known as utilization, or the amount you have used of each line of credit. If you have spent $10,000 on a credit card with a $15,000 credit line, you are above a 50% utilization, therefore your score will be negatively affected. Creditors like to see that you can manage your credit lines, rather than be slave to them.

Another 15% of your score is dedicated to your credit lifespan, or how long you have had credit lines open. Keeping old credit cards open, even if you do not use them, helps boost this part of your score by raising the average age of your accounts.

The remaining 20% is split between the types of credit you have open and how much credit you’ve been seeking. Its good to have a portfolio of credit, such as a credit card, mortgage and a car loan. This shows that you have experience with debt. The bank also takes into consideration how many inquiries are on your credit report, if you are actively seeking credit, you probably are in a financial hardship. When this is the case, most often lenders will either not want to lend you money, or they will do so at a greatly increased interest rate.

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.