The cost of borrowing money has been at record lows ever since the Federal Reserve began slashing interest rates in response to the 2008 credit crisis. The Fed controls the U.S. short-term interest rate--called the federal funds rate-- and has set it at almost zero since late 2008. The goal of this action was to encourage more borrowing and spending, and to trigger economic growth and job creation.
Fast forward to today. The Fed's stimulus efforts are showing noteworthy results, with the US economy showing signs of robust recovery after this month's solid jobs numbers. In fact, the economy is looking so good that economists are pulling their expectation for a first interest rate increase forward, instead of pushing it back.
Although it's hard to say exactly when, interest rates will eventually rise again. When they do, these are the 3 most likely ways the interest rate hike will affect your wallet.
Low federal interest rates mean that it is cheaper than ever to borrow money. For example, some banks and credit unions are offering fixed-rate loans at rates as low as 5.5%--cheaper than some of the federal government's offerings. Sites like cuStudentLoans.org and SimpleTuition.com are good for researching these types of student loan and repayment options.
For potential homebuyers, this is definitely the time to take advantage of low-interest rates. The average 30-year mortgage rate dropped to 4.16% as of June, and could trend upwards to 5% by the end of the year, although even 5% is still incredibly low for this mortgage term. However, every percentage point increase on a home loan can reduce buying power by 10%--so in order to get the most amount of home for your money, try to take advantage of low rates while you can.
From a historical perspective, car loans are at rock-bottom prices right now. The average commercial bank Annual Percentage Rate (APR) was 4.03% as of July. In 2009, it was around 7%. Expect to see similar rates through the rest of 2014 and even lower rates for borrowers with good credit.
Now is also a good time to consider refinancing or consolidating any existing debt -even credit card debt. It may allow you to get a lower interest rate, which would save money over the long-run. It worth noting that, generally speaking, when the Fed rate increases, adjustable-rate loan payments will increase too. For fixed-rate loans, a federal interest rate increase won't have any impact.
2. Deposit Accounts
Americans have been pretty savvy about saving but unfortunately; in this low-interest environment, they tend to store their cash in low-risk accounts that end up paying out negative returns once taxes and inflation are accounted for.
The low-interest rates paid on certificates of deposits (CDs), money market accounts and regular savings accounts will not increase very much this year. But credit unions can often offer better rates: For example, the rate on a five-year CD from F and A Federal Credit Union with a $1,000 minimum deposit is 2.30% versus .15% from Bank of America.
3. Credit Cards
Short-term credit card rates are expected to remain near current levels, at least through the end of this year. For consumers with fixed-rate credit cards, a rate increase won't change anything, however, many credit cards with variable rates are linked to federal rates, so a federal funds rate increase will typically lead to higher interest charges. Even if a credit card carries a fixed rate, credit card companies can change interest rates whenever they want to, as long as they provide advanced notice, so be sure to check your terms for the required notice.
This low-interest rate environment is all about low fees. Homeowners, homebuyers, students, graduates and car buyers have an opportunity to save money through refinancing or through low-interest rates.If you aren't in the market to buy a car or home right now, it's a good time to build up your savings. Look to credit unions and online banks (which consistently offer the best rates on average) for the highest yields on deposit accounts. Research the terms on your credit card and be sure to consider all the options available to you.
It's worthwhile to take advantage of low-interest rates while they're around because low-interest rates and low inflation are good--in the long run, at least--for just about every kind of investment, and for overall U.S. economic growth.