When the Federal Reserve raises or lowers its target interest rate, the change affects consumers too. The federal rate helps determine the interest you pay on loans and earn on savings, so it matters to just about everyone. Here’s what might change when rates rise or fall.
1. Your mortgage payments
If you have a fixed-rate mortgage, you won’t be affected by a rate change. However, with an adjustable-rate mortgage, your rate and payments can potentially increase or decrease. If interest rates are rising, check with your lender to find out how much your payment will increase and if it benefits you to refinance into a fixed-rate loan. If you’re planning to refinance a mortgage or you’re searching for a new fixed-rate loan, doing so after the Fed has trimmed rates might allow you to lock in a lower interest rate. However, other factors also play a role, such as your credit score.
2. Car loans
A low interest rate environment is good news for those looking to finance a car because you can borrow money more cheaply, but a rate increase makes financing a car more expensive. People with higher-interest car loans might benefit from refinancing if rates drop, depending on how big the difference is and the length of the loan term.
3. Your credit card rate
The annual percentage rate (APR) on most credit cards is variable. That means an increase in the target rate will likely drive up the interest you pay on your account balance, while a decrease can potentially lower the interest you pay—which may make it easier to pay down debt more quickly.
$5,000 credit card balance
| APR |
13% |
18% |
| Minimum payment |
$104.17 (assumes minimum payment of interest + 1% balance) |
$125.00 |
| Payoff time |
21 years, 8 months |
22 years, 8 months |
4. Private student loans
Interest rates on federal student loans are fixed, so those rates remain locked. If you’ve taken out private loans, however, your interest payments may increase or decrease with rate changes. Whether your loans are private or public, a lower interest rate environment might be a good time to check your options for consolidation to see if you can get a lower overall rate.
5. Returns on savings
One positive effect of a target rate increase may be higher interest rates banks pay customers in savings vehicles such as CDs, money market accounts and basic savings accounts. Although higher rates are good news for savers, don’t expect an immediate, dramatic change; rates tend to move gradually. When rates move lower, your savings vehicles could generate smaller returns.
The material provided on this article is for informational use only and is not intended for financial or investment advice.
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