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This month’s to-do list may include submitting a student loan application for a child starting college next year, shopping for a used car now that the old one is making that sputtering sound again, paying a mortgage bill, and paying a credit card statement balance. (Plus a little extra because there weren’t enough funds last month to pay off the statement balance.)

These are fairly run-of-the-mill chores for any adult’s to-do list. But there’s something out there that affects each of those four tasks. It’s called the LIBOR.

Every item on that list—a student loan, car loan, mortgage payment, and credit card bill—comes with an interest rate. The London Interbank Offered Rate, or LIBOR, affects interest rates across the globe.

Chances are, the LIBOR rate has affected almost every American today, either directly or indirectly. So, what is this LIBOR rate that is affecting everyone’s finances?

LIBOR is the interest rate that serves as a reference point for major international banks. Just as average joes might take out loans that carry interest rates, banks loan each other money at an interest rate. This rate is the LIBOR.

The LIBOR rate is recalculated every day and published by the Intercontinental Exchange, aka ICE, an American financial market company.

The LIBOR rate should not be confused with the US prime rate. The LIBOR rate is floating, meaning it changes every day. The US prime rate is another benchmark interest rate, but it stays fixed for an extended period of time.

The LIBOR is an international rate, so it’s based on five currencies: the American dollar, British pound, European Union euro, Swiss franc, and Japanese yen.

It also serves seven maturities, or lengths of time: overnight (also referred to as “spot next”), one week, one month, two months, three months, six months, and one year.

The combination of five currencies and seven maturities results in 35 separate LIBOR rates each day. Borrowers might hear about the one-week Japanese yen rate or six-month British pound rate, for example.

The most common LIBOR rate is the three-month U.S. dollar rate. When people talk about the current LIBOR rate, they’re most likely referring to the three-month U.S. dollar LIBOR.

Every day, ICE polls a group of prominent international banks. The banks tell ICE the rate at which they would charge fellow banks for short-term loans, which are loans that will be paid back within one year.

ICE takes the banks’ highest and lowest interest rates out of the equation then finds the mean of the numbers that are left. This method is known as the “trimmed mean approach,” or “trimmed average approach,” because ICE trims off the highest and lowest rates.

The resulting trimmed mean is the LIBOR rate. After calculating the LIBOR, ICE publishes the rate every London business day at 11:55 a.m. London time, or 6:55 a.m. in New York.

How LIBOR Is Calculated

So far, we know that a group of international banks submits interest rates to ICE, and ICE calculates the trimmed mean to find the LIBOR rate. But there’s more to it than that. Which banks are involved, and how do the banks decide what rates to submit?

ICE selects a panel of 11 to 16 banks from the countries of each of its five currencies: The United Kingdom, United States, European Union, Switzerland, and Japan. This group of banks is redetermined every year, so banks may come and go from the panel.

The chosen banks must have a significant impact on the London market to be selected. (The L in LIBOR does stand for London, after all.) Some of the current US banks are HSBC, Bank of America, and UBS, just to name a few.

The banks have a pretty complex way of determining their rates called the “Waterfall Methodology.” There are three levels to the waterfall. In a perfect world, every bank from the panel would be able to provide sufficient information in Level 1, and that would be that. But if a bank can’t provide adequate rates for Level 1, it moves on to Level 2; if it doesn’t have submissions for Level 2, it moves on to Level 3.

•   Level 1: Transaction-based. A bank determines rates by looking at eligible transactions that have taken place close to 11 a.m. London time.

•   Level 2: Transaction-derived. If a bank doesn’t have rates based on actual transactions, they provide information that’s been derived from reliable data, such as previous eligible transactions.

•   Level 3: Expert judgment. A bank only gets to Level 3 if it can’t come up with transaction-based or transaction-derived rates. In this case, its bankers submit the rates they believe the bank could afford to charge other banks by 11 a.m. London time.

Seems complicated, doesn’t it? And bankers from every bank on the panel go through the Waterfall Methodology every business day.

After the ICE Benchmark Administration (IBA) receives all the banks’ rates, they cut the lowest and highest numbers and use the remaining data to find the “trimmed mean,” and—tada!—that’s the LIBOR for the day.

Why LIBOR Matters

Wondering why people should care about LIBOR? If they don’t work at a bank, who cares? Well, LIBOR actually affects almost every person who borrows money. Many lines of credit, including credit cards, mortgages, auto loans, student loans, and more, are tied to LIBOR.

All federal student loans come with fixed interest rates. Once the government sets interest rates, that rate remains fixed regardless of what happens with LIBOR because it’s based on the 10-year Treasury note instead.

When it comes to things like private student loans and mortgages, however, Americans can choose between fixed-rate loans and variable-rate loans. With variable-rate loans, the borrower’s rate may increase or decrease along with the LIBOR rate.

That may seem like a scary way to determine rates. What if the LIBOR rate increases to, say, 10%? Many lenders place a rate cap on loans so variable-rate loans can’t become expensive to the point that many borrowers may feel they have no choice but to default on their loans.

So while the LIBOR does affect many variable-rate loans, borrowers shouldn’t worry about rates spiraling out of control.

When the LIBOR rate is low, it could be a good time for consumers to take some steps toward achieving financial goals.

They might consider consolidating or refinancing their loans, or even taking out a personal loan. If their income is steady and credit score is good, a low LIBOR rate could help them land a competitive interest rate.

Someone with no debt or a fixed-rate loan might think, “Phew! It looks like the LIBOR doesn’t affect me.” Actually, LIBOR affects everyone. When the LIBOR rate continues to increase, borrowing can become so expensive that many Americans can’t afford to borrow money anymore.

When people stop taking out loans or using their credit cards, the economy slows down and the unemployment rate could rise as a result. After a while, this could lead to a recession.

Remember the financial crisis of 2008? LIBOR played a big part in that tumultuous time for America.

Subprime mortgages started defaulting, and the Federal Reserve had to bail out insurance companies and banks that didn’t have enough cash. Banks were afraid to lend to each other, so the LIBOR rate surged and investors panicked, leading the Dow to drop by 14%.

And think about what is currently going on in the economy right now. Because of the coronavirus pandemic unemployment rates have skyrocketed and interest rates have dropped dramatically.

But, interest rates will no longer be tied to LIBOR in the near future. 2021 has been set as a deadline for financial firms to move away from using LIBOR. Financial firms are looking to tie to other rates, such as the Secured Overnight Financing Rate (SOFR), instead.

The History of LIBOR

How LIBOR Began

Why does LIBOR exist in the first place? Well, in the 1960s and 1970s, demand for interest rate-based goods such as derivatives started to increase.

The British Bankers’ Association (BBA) represented London’s financial services industry at the time, and the association decided there should be a consistent way to determine rates as demand grew. This led to the creation of the BBA LIBOR in 1986.

The BBA doesn’t control LIBOR anymore. In fact, the BBA doesn’t even exist. The association merged with UK Finance a few years ago. After some struggles and scandals took place on the BBA’s watch, ICE took over LIBOR in 2014. The BBA LIBOR is now the ICE LIBOR.

LIBOR Scandals

Bankers in ICE’s group of banks have been found guilty of reporting falsely low LIBOR rates. In some cases, these lies benefited traders who held securities tied to the LIBOR rate.

In other instances, the banks raked in the dough by keeping LIBOR rates low. People tend to borrow more money from banks when rates are low, so by deceiving the public, banks conducted more business.

In 2012, a judge found Barclays Bank to be guilty of reporting false LIBOR rates from 2005 to 2009, and the CEO, Bob Diamond, stepped down. Diamond claimed other bankers did the exact same thing, and a London court found three more bankers guilty of reporting false LIBOR rates.

After the 2008 financial crisis and 2012 scandal, it became clear that there were some flaws in how LIBOR was determined.

The Financial Conduct Authority of the United Kingdom started overseeing LIBOR, and in 2014, the ICE Benchmark Administration (IBA) took over LIBOR and started changing how things were done.

How LIBOR Is Changing

LIBOR has gone through a lot of changes since 1986. In 1998, the bankers were told to change the question they asked themselves each morning before reporting their rates. Bankers used to base rates on the question, “At what rate do you think interbank term deposits will be offered by one prime bank to another prime bank for a reasonable market size today at 11 a.m.?”

Now they should ask themselves, “At what rate could you borrow funds, were you to do so by asking for and then accepting interbank offers in a reasonable market size just prior to 11 a.m.?” The questions may seem similar, but the change in wording showed that the BBA was trying to keep them honest.

In 2017, the IBA held a three-month test period of LIBOR standards in an attempt to limit further scandal.

LIBOR has changed currencies over the years. There used to be more than the remaining five currencies and more than the seven maturities, but some were added and removed after the financial crisis of 2008.

But despite all the attempts at improvements over the years, CEO of the FCA Andrew Bailey has announced that he hopes to stop using LIBOR by the end of 2021.

Some say LIBOR is becoming less reliable as banks make fewer transactions that depend on its rate. The Federal Reserve is proposing American banks use alternative benchmark rates, one option being an index called the Secured Overnight Financing Rate (SOFR) .

Competitive Interest Rates With SoFi

It’s difficult to know what will happen with the LIBOR rate next week, next month, or even at the end of 2021. But one thing’s for sure: benchmark rates continue to affect the US economy and consumers’ loan interest rates.

When members apply for a loan through SoFi, borrowers can choose between variable rates (which would be more directly affected by fluctuations in benchmark rates) or fixed rates on a variety of loan products.

SoFi offers variable-rate or fixed-rate mortgage, variable rate or fixed rate private student loans, or fixed rate personal loans. They may also be able to refinance their student loans or mortgages for more competitive rates if they qualify.

SoFi members can receive other discounts when they borrow through SoFi. For example, when student loan borrowers set up automatic payments, they are eligible to receive a reduction on their interest rate.

Whatever happens with LIBOR, SoFi members can benefit from perks like unemployment protection, exclusive member events, and member discounts.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

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A hospital bill in the thousands. A vet invoice for hundreds. A car repair for more than you make in a month. When faced with an emergency, it can compound the problem to try to figure out how to pay for the unexpected expenses, on top of an already stressful situation.

If you find yourself questioning, “Should I have an emergency fund?” the answer should be a resounding yes, absolutely! But where to begin? Forty percent of Americans say they are unable to afford even a $400 emergency expense.

Conventional wisdom claims you should have enough money saved in an emergency fund to cover at least three to six months of expenses, depending on your personal financial situation.

But with looming student debt, credit card payments, or other big financial burdens, it can be hard to imagine saving while keeping up with all of your bills and expenses. Emergency funds are great for major unexpected expenses, but preparing for the unexpected still takes time and planning.

Beefing up Your Budget

One of the first ways you can start saving up for an emergency fund is to evaluate your current spending habits and create a budget, if you don’t already have one. Take a look at where there is fat to trim, meaning extra expenses you can minimize or eliminate.

Start with a simple spreadsheet, which should help you break down your spending to see your total income, plus what you spend on necessities like rent, loan payments and groceries, discretionary spending like shopping or entertainment, and long-term goals, including emergency fund savings or retirement.

For a two-income household, you could aim to have three months of expenses in your basic emergency fund, with six months for a one-income household.

In a recent survey, 67% of millennials report having a savings goal and sticking with it every month, or most months. Your overall savings goal might actually include more than just saving for an emergency fund.

One common tactic for an easy budget to stick to is to put 20% of your take-home income toward financial goals, such as savings, and then make part of that just for your emergency fund.

You might want to look at your current bills and deadlines and see what you can adjust to make the most sense with your paydays. If you get paid every two weeks, but all of your bills are due at the end of the month, maybe you find you are dipping into those savings to pay everything on time.

You could try spreading out your bills throughout the month or grouped closer to your paychecks, so you can better budget your money throughout the year. Everybody’s financial situation is different, so figure out what works for you—and stick with it.

Having an emergency fund means you’ll be better prepared to cover any urgent, unplanned financial crises, like a high medical bill or costly car repair, without ruining your normal budgeted living expenses. With money set aside, you’ll be able to stress less and avoid more costly solutions like credit cards or personal loans to fund any emergencies.

However, one possible disadvantage to trying to build up your emergency fund is that you might feel like that money should be going toward paying off debt, like student loans or credit cards, before storing away funds in savings. But it’s important to know good debt from bad in this case.

A mortgage or student loan is generally considered good debt, while a high-interest credit card can be worse for your overall credit score and financial health. If you are weighing paying off debt versus building up your emergency fund, you might consider this order to figure out your top priorities:

•   Make sure you have enough money in the bank to pay any recurring bills.
•   Build a safety net equal to one month of your basic expenses
•   Match any contributions your employer makes for retirement contributions.
•   Pay off bad debt, like high-interest credit cards.
•   Build up your emergency fund.

Once you have three to six months’ worth of expenses saved up for your emergency fund, you can refocus your budget on other long-term goals.

Putting Savings on Auto Drive

If you already use direct deposit, you’ve already got a possible solution to help you fund an emergency reserve. You can set up a recurring transfer with your bank, or split your direct deposit into a checking and a savings account, in order to make savings automatic.

If you don’t notice the money sitting in your account in the first place, it might be less tempting to spend it or move it back out of savings.

So how much can you afford to automatically transfer? The Consumer Federation of America says that an emergency savings fund should consist of at least $500 . They recommend using a savings account that you do not have easy access to, perhaps at a different bank than your current home bank.

You can kick-start your emergency fund by using a cash windfall like a tax refund, work bonus, or birthday check.

You could aim first to get to $500, then $1,000, then one month of essential living expenses, and work your way up from there.

You probably aren’t going to generate three or six months worth of extra money all at once.

Automating your savings might help, whether you choose to have a certain amount from your paycheck transferred into a separate savings account, or set up recurring transfers from checking to savings with your bank.

Then, when you do reach a comfortable number in your emergency fund, you can redirect those automated savings toward other financial goals like paying off debt or funding retirement.

Saving Smarter, Not Harder

So, if you’re determined to start saving more for an emergency fund, you might want to explore exactly what kind of savings account you want to keep your money in.

Certain accounts can earn you significantly more money based on the amount of interest. This could help your emergency fund grow even faster while rewarding you for saving money rather than spending it.

In fact, a SoFi Checking and Savings® account has no account fees. Plus, as a SoFi member, you’ll also receive other benefits to help you figure out your finances, like career coaching, mobile transfers, financial advisors, and community events.

We work hard to charge zero account fees. With that in mind, our fee structure is subject to change at any time.

Before you start saving up for an emergency fund, consider what kind of account you want to keep that money in. It can be helpful to have easy access to cash, in case you are ever faced with a financial emergency.

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SoFi members with direct deposit activity can earn 4.20% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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