Banks Lower Prime Lending Rate Small Cut Will Affect What Consumers Pay For Loans

The cut in prime lending rates at banks nationwide Wednesday was a stocking stuffer for consumers - it will knock a few bucks off January’s credit card bills and other loan payments at many households.

But big savings on the cost of paying off loans probably could reach consumers by summer, economists said. Most believe the Federal Reserve will continue to shave key interest rates next year, which will lead banks to reduce prime lending rates even further.

“This move is going to end up being part of a bigger move later on,” said James Coons, vice president and chief economist at Huntington National Bank in Columbus, Ohio.

The nation’s banks cut the prime lending rate to 8.5 percent from 8.75 percent following the Federal Reserve’s decision Tuesday to lower a key short-term interest rate by one-quarter percent. The Fed reduced the federal funds rate - the interest rate banks charge each other for overnight loans - to 5.5 percent.

The move was designed to get the sluggish economy percolating again by making it more attractive for people and businesses to borrow and spend money.

When banks’ own borrowing costs fall, they usually lower the interest charged on loans.

The prime, once the rate banks charged their most creditworthy customers, has become a benchmark for many consumer and business loans.

Rates on credit card, auto, home equity and small business loans are based on the prime rate. So when the prime falls, so do a parcel of other interest charges.

More than $225 billion of the $350 billion owed on bank credit cards is directly tied to the prime rate, according to RAM Research Group, a Maryland-based firm that tracks credit cards.

The rate cut will save American credit card holders at least $500 million in interest charges in 1996, said Robert McKinley, RAM’s president.

The savings for individual households is far less dramatic. The average cardholder carries a balance of $1,900. A 0.25 percentage point cut in interest rates translates to an annual savings of only about $5.

“It’s a very tiny gift, but it does help,” said McKinley. He noted that most households have two or three cards, so the savings add up.

Families will get the savings right away. About 65 percent of all cards with variable rates are adjusted quarterly, about 35 percent adjust monthly and the rest change rates annually. Some home equity and other personal loans also are adjusted quarterly.

That means many consumer will see lower interest charges on their January bills.

Borrowing has ballooned 30 percent in the last few years, with consumer debt topping $1 trillion in October, according to the most recent Fed data. Some people have gotten in too deep: Recent surveys show more people are late in paying off bills or are simply not paying them back at all than at any time in the last few years.

Lower interest rates could ease the burden of paying off loans, but the Fed’s move is a double-edged sword. Rate easings tend to boost consumer confidence, making people more comfortable about spending the money they have, or borrowing more.