It’s time to pull out those loan documents from your bank, because an upcoming technical change to the way interest rates are set could have an impact on how much you repay, Inc. reports.
LIBOR stands for the London Interbank Offered Rate, and it’s going to be retired at the end of 2021. LIBOR is the interest rate that up to 16 banks charge each other for short-term, unsecured loans. Since there were relatively few transactions of this type, the banks often make estimates instead. That makes the index vulnerable to manipulation.
In 2008, manipulation of LIBOR was one of the factors that exacerbated the global financial crisis. Still, LIBOR remained the most common base rate used in business lending, according to Fran Garritt, director of global markets risk and credit risk for the Risk Management Association.
“For most small businesses, the last thing they’re going to worry about is what’s going on with LIBOR,” says Marilyn Landis, president and CEO of Basic Business Concepts, which provides CFO services to small businesses. “But it could be a hit to them, depending on how banks handle it.”
LIBOR is most likely to be used in variable-rate loans, including lines of credit or adjustable-rate term loans. SBA Express Loans may be LIBOR-pegged, as are loans from the Main Street Lending Program. Trade finance contracts often use LIBOR, as do hedging products such as interest rate swaps. LIBOR is also common in accounting, valuation, and financial modeling, according to Garritt. Read the full story from Inc.