ROANOKE TIMES
Copyright (c) 1997, Roanoke Times
DATE: Wednesday, March 26, 1997 TAG: 9703260056
SECTION: BUSINESS PAGE: B-6 EDITION: METRO
DATELINE: NEW YORK
SOURCE: ASSOCIATED PRESS
A quarter percentage point increase will boost monthly payments $17 on a $100,000, 8-percent, 30-year mortgage.
Banks and credit-card companies that already had started tightening the screws on consumer loans are likely to squeeze even more, now that the Federal Reserve has raised short-term interest rates by a quarter of a percentage point.
As rates rise on everything from credit cards to car loans to adjustable-rate mortgages, the people who will be most pained by such an increase will be the risky borrowers, who already are paying top dollar to borrow money.
A small number won't be able to pay the increase. Others will not meet the new, stiffer loan qualifications.
``A quarter-point doesn't sound like much,'' said James J. Daly, associate editor at Credit Card News. But for some people, ``it could be the proverbial straw that breaks the camel's back.''
On Tuesday, the Fed boosted its target for the federal funds rate, which banks charge each other for overnight loans.
Banks started responding to their higher cost of funds by raising the prime rate, which they charge their best customers, by the same amount. Since many consumer loans adjust quarterly or monthly with the prime rate, the interest rate on those loans will rise as well.
By itself, an increase of 0.25 percentage point is not likely to send most consumers into bankruptcy. Some economists even called it a largely symbolic gesture on the Fed's part.
A quarter percentage point increase will boost monthly payments $17 on a $100,000, 8-percent, 30-year mortgage. Payments on a five-year, 11 1/2 percent new car loan of $17,500 will go up $2.20. A quarter point rise will add about $10 a year per household in interest payments on credit cards.
``A quarter-point today is barely going to make the radar screens of most consumers,'' said Kenneth Mayland, KeyCorp's chief economist.
But the increase could hasten last call at the party of easy credit and fat profits from high-yielding loans, analysts said.
Credit-card companies are no longer randomly stuffing mailboxes with multiple come-ons. The number of solicitations for new credit cards fell between 20 to 30 percent this year, analysts estimate.
The credit card industry is not the only one pulling in its horns.
Some companies that specialize in financing used-car loans for buyers with bad credit histories have run into hard times lately - troubles that could make it harder for them to raise money to lend out, especially if rates move much higher.
The biggest worry among lenders is that the Fed isn't finished. If it is serious about fighting inflation, it is not likely to stop at a quarter-point tightening, economists said. If rates continue to rise, consumers will borrow and spend less, which could move the economy closer to recession.
``The process of solving an inflation problem involves tempering the growth tendencies of the economy,'' Mayland said, ``and the burden of that process probably falls disproportionately on the lower-income person, the most marginal workers, etc.''
LENGTH: Medium: 65 linesby CNB