How the President-Elect Can Affect Personal Loans

The influence is limited, but it's there.

Changes in the political and economic landscape affect everything from interest rates to employment to average income. Understanding these changes can help you make smart financial decisions.

The president can affect your financial livelihood in a number of ways. If you're considering borrowing money, you might want to know how the president-elect influences personal loans. Here's what you need to know.

The president-elect and the Federal Reserve

The Federal Reserve (or "the Fed") is independent from the executive, legislative, and judiciary branches of government. It is largely insulated from political influence by design. While Congress sets the goals of the Federal Reserve -- price stability and low unemployment -- the members of this central banking system have full discretion over how they achieve those goals. This independence is important. Decisions that are best for the economy in the long run are often politically unfavorable and difficult in the short run.

The president-elect does have the power to nominate Fed board members -- including the Chair and Vice Chair -- which then must be confirmed by the Senate. That said, board members serve 14-year terms with a new term starting every two years. As a result, no single president could ever nominate a majority of the board.

No member of the government, the president included, can order the Federal Reserve to take a certain action. However, that hasn't stopped many U.S. presidents from pressuring the central bank to implement monetary policies for their own political advantage. Often, presidents who are up for re-election seek monetary policies that will provide a short-term economic boost to help them win favor.

Famously, the Nixon tapes show former U.S. president Richard Nixon pressured Federal Reserve Chair Arthur Burns to enact expansionary monetary policy, despite concerns about inflation. Presidents Herbert Hoover, Harry Truman, John F. Kennedy, Lyndon B. Johnson, and Ronald Reagan have all tried as well. Last year, President Donald Trump criticized the Federal Reserve repeatedly for not lowering rates to stimulate the economy, claiming that he could demote Fed Chair Jerome Powell. Whether or not the president-elect has the power to fire the Fed Chair is still a legal gray area. Doing so would be highly unconventional.

How changes in the federal funds rate can impact personal loans

Control over interest rates is one of the central tools the Federal Reserve can use to guide the economy. It sets the target federal funds rate, which is the interest rate at which banks borrow from each other. Raising this rate slows rapid growth and protects the economy against inflation. On the other hand, lowering it stimulates the economy. Currently, the federal funds rate is set to zero in an attempt to pull the economy out of recession. This has caused personal loan rates to fall substantially.

You've probably noticed that the interest rate set by the Fed isn't the same as the interest rates you pay. However, the two are connected. When it comes to personal loans, the federal funds rate plays a part, but your credit score and the current economic climate are bigger factors. This means that changes in the federal funds rate are often, but not always and not immediately, reflected in personal loan rates.

That being said, many personal loans come with fixed interest rates. This means your interest rate isn't going to change over the term of your loan, regardless of changes in the economy and the federal funds rate. Variable-rate loans, on the other hand, have interest rates that can shift over time.

How are personal loan interest rates determined?

Banks are free to set interest rates on personal loans however they wish. Generally, they determine personal loan rates based on the following factors:

• Cost of obtaining your loan funds
• Costs of processing and servicing the loan
• Risk they take on by lending to you
• Competition from other financial institutions
• Their profit margin goals

This means that the personal loan rates you qualify for are largely influenced by your creditworthiness and the bank's overhead costs as well as the federal funds rate and the current economic climate.

What to consider if you're looking for a personal loan

If you're shopping for a personal loan, there are a couple things you should look for. Specifically, pay attention to the APR and interest rate you'll be charged. These determine the cost of your loan over time.

Imagine you took out a $20,000 personal loan with a 12% interest rate and 5-year term. You'd pay about $445 a month. In the end, this loan would cost you almost $4,300 in interest charges alone. The same loan with a 7% interest rate would require monthly payments of about $395 and cost $1,365 in interest. If you can secure the loan with the lower interest rate, you'd save nearly $3,000.

Interest rates aren't the only thing to consider when looking for a personal loan. There are a number of fees you should look out for, as well. For example, late payment fees are fairly universal, but it's still worth looking for a lender with low late fees. Origination fees are somewhat common, too. Still, it's better to look for a lender that doesn't charge them. You should also avoid prepayment fees. These fees are charged if you decide to pay off your loan early.

Finally, you'll want to consider the loan amounts and loan terms offered by each lender. Calculate your monthly payments, including the interest and fees, to make sure you can afford them.

The bottom line

The president-elect has limited direct influence over personal loans. That being said, the state of the economy does impact personal loans. And of course, the economy is hugely influenced by the president. That's why it's important to vote.

Regardless of who is elected, though, you have control over the loan terms you qualify for and accept. Maintaining good credit can help you get the best loan rates, and careful research before you jump into a loan will help you find the best deal.