What Is Considered a Good Interest Rate?

A “good” interest rate is really going to be relative to the type of debt obligation that is being compared. Whether an interest rate is good or not is a subjective assessment. It will depend on the market and the FEDs fund rate and how that interest rate compares to the general interest rate market. Market rates vary based on the LIBOR and PRIME rate which are all functions of the FEDs funds rate. In the hopes of achieving maximum employment and minimal inflation, the Federal Reserve sets the FED Funds rate in order to meet its dual mandate. Given this fact, all interest rates are derived from the FED funds rate to some extent and vary based on a borrower’s credit worthiness and the degree of risk associated with a given financial product.

Making an Apples to Apples Comparison

If you want to judge whether you got a good interest rate or not you’re going to need to make a 1-to-1 comparison. A good interest rate is relative to what kind of borrowing option was used. If you don’t make an apple to apples comparison it will be nearly impossible to correctly judge how good of an interest rate you got or didn’t get. You cannot compare a credit card interest rate with a mortgage interest rate. They are two completely different financial products with varying amounts of risk and due to this they’ll have vastly different interest rates and vastly different considerations for what could be considered a “good” interest rate. Relatively speaking a good interest rate for a credit card could potentially be 12%, while a good interest rate for a mortgage could be 6%. This is why it’s important to make sure you make a “relative comparison”.

Timing

When you take out a loan and the interest rate granted to you is probably the single most important thing that will determine your interest rate. Relatively speaking, you might have gotten a mortgage interest rate that seemed very high 5 years ago but by today’s standards it’s a great interest rate. Everything is relative and what might be a great interest rate in today’s market could be a very bad one years down the road.

A good interest rate is relative to when you acquired the loan and what kind of loan you got. We can't all