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Financial Literacy
Course: Financial Literacy > Unit 4
Lesson 3: Interest and debtHow rising or falling interest rates might affect you
How will rising or falling interest rates affect your budget? Let's find out.
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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.
| 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.
Want to join the conversation?
does it change over time, if so how long would it take to have higer rates(10 votes)
What are the effects of low interest rates.(4 votes)
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.(8 votes)
is it bad to have low interest rates for a long time?(6 votes)- 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.(4 votes)
how I manage my car loan(3 votes)
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.(3 votes)
Are private loans effective?(4 votes)- What type of loans are good for when interest rates are low?(4 votes)
- Its talking about h0w to do taxes and how to uses a debit card(3 votes)
- Cambia con el tiempo(3 votes)
- How do interest rates change prices, and how?(2 votes)
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)
- is it bad to have high interest rates?(2 votes)
- If you are borrowing money, look to get it at the lowest interest rate, because interest compounds the amount you owe if you let it go on too long. I just used an interest calculator. I imagined borrowing 1000 at 8% and offered to pay it back at 45 per month. It told me that I could do that in 24 months, but would have paid back 1085 by then. I reset it to an interest rate of 5%, and offered the same 45 per month. It said I could pay it back that way in 23 months, and have paid back 1055 by then. Interest makes a difference.(2 votes)