Borrowing money always comes with some kind of cost. Most banks, businesses and government make use of that market and cost is going up. The instability within the European short term loan market is contributing to this increased rate, despite the Federal Reserve's pledge to hold rates low.

Short term loan basics

When a business or a bank is in need of a short term loan, they get it from the unsecured loan market. These markets deal in dollar loans lasting up to 270 days. The bank or business pays the lender a percentage of what they borrow to pay for the loan. The rate for this short term loan is typically based upon off a rate called the "Libor" - the three-month London Interbank Rate. Right now it is .54 percent.

Where the rate is expected to go

While the short term capital markets have kept their rates relatively low during the recession, the rates are expected to go up. Futures markets are estimating that the rate will go up to 0.70 percent or higher by 2011. Banks and businesses could have to pay more to continue operation. Consumers will also feel the pinch as rates go up, because the availability of products and services will go down, meaning prices go up.

Rate goes up?

Because risk is going up, the rate will go up. The rate is only determined by risk. The more risk, the more it costs. European economies, such as Greece and Spain, have been feeling the pinch lately. Since the economies in these countries are very unstable, lending money is a lot more risky. However, if the rates do go up, then the United States Federal Reserve, which sets bank-to-bank lending rates, will be in a tough situation.