Falling deposit rates outpace loan rate drops

A comparison of current deposit interest rates versus current loan rates suggests that banks may be manipulating falling interest rates to their advantage. While interest rates drops on borrowing have benefited many consumers, the rates on loans would be even lower today if they were keeping pace with the rate drops seen on deposit products.

The Federal Reserve has been among the primary factors driving the current low interest rate environment. In an effort to stimulate growth by making borrowing easier, the Fed has driven the Fed funds rate down to near zero. This, however, only affects extremely short-term loans made to banks. The Fed has also taken the extra step of buying U.S. Government and mortgage-backed securities, in an attempt to drive down longer-term interest rates. How much has this helped consumers get cheaper borrowing rates? The results are a mixed bag.

How far have rates really fallen?

The following compares some key consumer loan rates from before the recession (2007) with the most recently available figures, to show how much they've declined:

• Mortgage rates. In 2007, 30-year fixed-rate mortgages averaged 6.34 percent, according to data from Freddie Mac. Recently, they were down to 3.96 percent - an all-time low, and a 2.38 percent drop from their pre-recession level.
• Car loan rates. In 2007, four-year car loan rates averaged 7.77 percent, according to Federal Reserve data. Recently, these rates were at 5.94 percent, a 1.83 percent drop.
• Personal loan rates. Federal Reserve data shows two-year personal loan rates at an average of 12.38 percent in 2007. Recently, these loan rates averaged 10.82 percent, a 1.56 percent drop.
• Credit card rates. According to the Federal Reserve, the average credit card rate was 13.30 percent in 2007. Recently, these rates were down to 12.28 percent, a drop of 1.02 percent.

In short, while the drop in mortgage rates has been dramatic, declines in other rates for consumer credit have much milder. That's important for day-to-day economic activity, because people use their credit cards or purchase cars much more often than they buy houses.

The question is, should those declines in interest rates have been enough to stimulate the economy? A telling comparison puts these lower consumer interest rates in true perspective.

Who really benefits from lower interest rates?

The other side of the interest rate equation is the level of interest rates on CDs, savings, and money market accounts earned by consumers. Take CD rates, for example. The Federal Reserve shows that 6-month CD rates averaged 5.23 percent in 2007. By 2011, they were down to 0.42 percent - a drop of 4.81 percent.

Putting all of this together shows that the interest consumers earn on their bank deposits has dropped by more than twice as much as mortgage and car loan rates have fallen, more than three times as much as personal loan rates have fallen, and more than four times as much as credit card rates have fallen.

That may be good news for banks, which clearly benefit from this equation, but if consumers find it less stimulating, the numbers demonstrate why.