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How rising or falling interest rates might affect you

How will rising or falling interest rates affect your budget? Let's find out.  The material provided on this website is for informational use only and is not intended for financial or investment advice. Khan Academy assumes no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment options. Khan Academy doesn’t provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
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
APR13%18%
Minimum payment$104.17 (assumes minimum payment of interest + 1% balance)$125.00
Payoff time21 years, 8 months22 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.

Want to join the conversation?

  • aqualine seed style avatar for user Jaden
    does it change over time, if so how long would it take to have higer rates
    (11 votes)
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  • blobby green style avatar for user JONASS
    is it bad to have low interest rates for a long time?
    (8 votes)
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    • blobby green style avatar for user Ahmad
      Not for you as a person but might be troublesome for the economy as a whole because when there is a lower interest rate there will be a much higher borrowing which might result in inflation. Moreover, people will take much more loans than they can afford to pay which will result in more defaults. As people continue to take out loans the State will have to print more money because no one would want to keep his money in the bank because of the low interest rates this will result in a surplus of Dollars which will drop the value of the Dollar as a whole result in huge inflation.
      (5 votes)
  • piceratops sapling style avatar for user cmen1286
    What are the effects of low interest rates.
    (4 votes)
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    • hopper jumping style avatar for user Yuya Fujikawa
      The fed may lower the interest rate if the economy is stagnant. This is to bring about an economic stimulus. Lower interest rate means that it's easier for borrowers to take loans or borrow money. For example, a manufacturing company may decide to borrow money (and perhaps issue bonds) to expand their production lines. This would create more jobs, decreasing unemployment, and in turn encouraging more spending. On the other hand, if inflation is on the rise and economy is becoming overheated, they could raise the interest rate to cool down the economy to avoid rampant inflation. The fed lowering or raising interest rate is part of what is known as monetary policy - as opposed to fiscal policy which is associated with regulating government income and spending.
      (9 votes)
  • blobby green style avatar for user Xy H
    Can someone explain the $5,000 credit card balance table?
    (5 votes)
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    • aqualine tree style avatar for user David Alexander
      I will try.

      Start with the $5000. This is the amount of money you owe the bank because you have used your credit card to buy that much stuff.

      Every month, the bank asks you to pay back the full amount, but allows you, instead, to pay back just 1% of it, plus some interest on the amount you do not pay back.
      If your annual interest rate is 13%, the minimum monthly payment will be $104.57, and it will take you 21 years and 8 months to pay back the $5,000. If the interest rate is 18%, the minimum monthly payment will be $125, and it will take 22 years and 8 months to pay back the $5,000.
      (6 votes)
  • blobby green style avatar for user Gage Rottum
    What’s the point of a savings account
    (5 votes)
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    • aqualine tree style avatar for user David Alexander
      This is a fair question. "Earning interest on your deposit" is NOT the point, because savings accounts don't keep up with inflation.
      Perhaps a savings account is useful because it keeps your resources more secure than if they are kept under the mattress of your bed or in a jar buried in your back yard.
      Perhaps a savings account is good because if you have an ATM card associated with it, you can get cash from an automatic teller machine even when you are away from home. Perhaps a savings account is good for you because by having to go GET your money might keep you from spending it and help you to save something. Perhaps by having a savings account and maintaining a steady record of adding to it, rather than spending it all whenever you accumulate a hunk of cash, you contribute to a good credit score.
      Consider these "perhaps" statements, and make your decision.
      (4 votes)
  • leaf green style avatar for user antoinelouis974
    how I manage my car loan
    (3 votes)
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    • eggleston blue style avatar for user prplwater
      They tell you the minimum and the interest. when paying each month you would pay the minimum and if you can pay extra, because the faster you pay, the less interest you'll have to pay, but the longer you take to pay it off, the more you'll have to pay. Also, if your late you'll have to pay late fees. In short, its better to not borrow money.
      (4 votes)
  • starky sapling style avatar for user Jonathan
    Are private loans effective?
    (4 votes)
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  • blobby green style avatar for user sespi4382
    What type of loans are good for when interest rates are low?
    (4 votes)
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  • aqualine seed style avatar for user coulterka35
    How do interest rates change prices, and how?
    (3 votes)
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    • aqualine tree style avatar for user David Alexander
      When a farmer wants to grow a field of soybeans, she needs seeds. To buy those seeds, she borrows money and pays interest on the loan. When the crop is harvested, she hopes to get back at least enough money to pay off the loan and the interest on it. If the rate is high, she has to pay more for the use of the money. She, then, asks for more money for her harvest. Prices go up.
      (2 votes)
  • blobby green style avatar for user escobarandy0301
    what causes interest rates to fall and rise?
    (3 votes)
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