What is LIBOR

Libor stands for the London interbank offered rate. It is the interest rate banks charge each other to make overnight loans. Most loans that eventually find their way to you begin at the top with the 16 banks that set Libor. And because banks are increasingly nervous about each others’ financial situation, last night something incredible happened: Libor surged the most ever. It rose more than 4% to 6.88%.

Think about that. The most basic interest rate banks charge each other more than tripled.
If banks are going to charge each other nearly 7% for a one-day loan, it says two things. First, they are scared and not willing to lend money unless they are compensated for the risk. Second, credit is likely to tighten up at your level for cars and other loans.

The move in Libor is equivalent to the interest rate on your credit card soaring from 15% to 45%. You may be willing to put that dinner or pair of Levi’s on the card at 15%, but you will be much less likely to use that credit if you have to pay 45% interest. Banks think and act the same way.

Most consumer loans, including how many ARMs will reset, are tied to Libor in the long run. Interest rates trickle down. Libor can be dull to talk about, but the impact on you is anything but.