Help! Loan advise needed (prime rate vs LIBOR)

audiobliss

Ok, so I'm within a day or two of deciding on a private loan for covering my summer school expenses, and I've narrowed it down to two loans. However, one has a prime-based interest rate and the other a LIBOR-based interest rate. And I really have no clue how to go about comparing them in that aspect.

I looked at charts reporting their trends over the last ten years, and with the exception of the last two years, LIBOR seems more fickle, but to a lesser degree. Meaning, all the changes are relatively small. Prime seemed to be more over the place. But for the last two years prime has been fixed at 3.25%, so obviously it's been more stable in that time frame.

So, my question is 1) do you have some advice on LIBOR vs prime? 2) What's a good way of comparing the two, from a loan perspective?

When I add in the lender's margin, the total interest rates from these two lenders are essentially the same.

At the moment I'm leaning towards the prime-based lender, but ONLY because I really like the interface of their website and the whole application process and calling them up has been really smooth. That counts, but I realize it's not the most important part of this decision making equation.

So, I'd greatly appreciate it if you have ANY advice you can throw my way!!

jflail2

I think (and hopefully someone with more knowledge can chime in on this one):

1.) Prime is the rate banks charge their very best customers.

2.) LIBOR is the rate for banks lending to one another in England.

3.) both are used as bases for loans.

4.) Prime is almost a fixed rate, whereas LIBOR is variable rate. I don't think Prime has changed from 3.25% since late 2008 or something like that, where as LIBOR changes on a daily basis.

5.) Prime is usually 2-3% higher than LIBOR.


If you've got a pretty comparable rate for both lenders, my mildly educated guess would be to go with the LIBOR rate as the spread between prime and LIBOR is continuing to grow.

audiobliss

Thanks for the input. I'm still leaning toward the one based on prime rates, but from the very little I've read, LIBOR-based interest rates seem pretty attractive, too.

shack

jflail2 wrote:

I think (and hopefully someone with more knowledge can chime in on this one):.

1.) Prime is the rate banks charge their very best customers. Correct...sort of. Very few if any customers are currently getting prime rate. Right now it is artificially low because most banks peg their Prime rate to the Feds discount rate (the rate banks can get when they borrow from the Fed). The Fed's discount is being kept lower than it should be because the govt. doesn't want to do anything that might stall the recovery (that ISN'T happening). Banks cannot make money lending at 3.25%...even to their best customers. Most banks have set floor rates from 4.50-6.50% even for loans that are "Prime Rate" loans.

2.) LIBOR is the rate for banks lending to one another in England. Again correct...sort of. It is the rate used between banks at the London Interbank market (London InterBank Offering Rate = LIBOR). Most of the Banks from the industrialized Nations (including US banks) are members of the London Interbank...not just English Banks.

3.) both are used as bases for loans. Correct

4.) Prime is almost a fixed rate, whereas LIBOR is variable rate. I don't think Prime has changed from 3.25% since late 2008 or something like that, where as LIBOR changes on a daily basis. Incorrect - The prime rate is a daily rate also. What many banks will do is refer to the "Wall Street Journal Daily Prime Rate" which is an average of several of the big bank Prime rates. The only reason it hasn't changed much lately is because the Fed has chosen to hold the Discount rate steady due to the recession. Banks don't have to follow the Feds lead and can set their own individual "Prime Rate" if they choose to do so...but most just follow the lead of the big banks (price collaborating "lite" if you will, since no banks buck the trend)

5.) Prime is usually 2-3% higher than LIBOR. Incorrect. Again it depends upon the markets and what is happening. I have actually seen LIBOR higher than Prime rate.

Compare the end result and take the rate that is lower NOW. Both markets will start to see inflationary pressures as soon as their economies heat up and the rates will rise accordingly. It is nearly impossible to say which one will move first or the most. Some say the US economy will improve sooner than the Euros...which might mean inflation hits here first...but that is not universally accepted. Chances are they will move in similar fashions and the differential will be negligible in the amounts you are talking about borrowing.

audiobliss

Thank you for providing some clarification, shack! I ended up choosing the loan based on prime. Prime + 1 isnt' too bad; now fingers crossed that prime doesn't soar through the roof!