Rising Interest Rates and Borrowing

Posted by Dan Harrington on Feb 26, 2019 Dan Harrington

The Federal Reserve closed out 2018 with another interest rate hike, the fourth for the year. That’s good news for savers, who can look forward to savings accounts one day rewarding them with higher returns.

a magnifying glass held over text: interest rates

The news is less encouraging if you have significant credit card debt, money tied up in student loans, or are planning on borrowing money for a major purchase. The Federal Reserve has initiated nine interest rate increases since 2015, each one small enough to not give consumers cause for alarm. There’s no reason to be alarmed about this latest increase, either. It does pay, however, to be aware of how these cumulative rate increases impact various borrowing scenarios.

  • If you purchased your home on a fixed rate loan, interest rate hikes are of no consequence to your finances. The interest charged on your loan will stay the same, unless at some point you refinance for a lower rate. But if you financed your home with an adjustable rate mortgage (ARM), or you have borrowed money against your home with a home equity line of credit (HELOC), you can expect your monthly payments to go up. Does that mean you should refinance ASAP? Maybe. If your ARM is nearing its adjustment period, you might want to consider refinancing for a lower rate. If that adjustment period is several years down the road, however, you can probably stay the course.
  • Credit Cards. Your credit card company will not raise interest rates immediately, but a billing cycle or two into 2019, don’t be surprised if those rates take a jump up. If you pay off your credit card balance each month, you have nothing to worry about. Ditto if you carry just a small amount of debt on your cards. The extra interest charges will be minimal. But if you are one of the millions of Americans with an average credit card debt hovering in the $5,700 range, now may be a good time to explore a no-interest balance transfer to a new card. There are a lot of good offers to choose from these days, most offering balance transfers with no interest from 14 to 20 months. You can do some comparison shopping online at creditcards.com.
  • Student Loans. As with home mortgages, you have nothing to fear if you locked in your college debt with a fixed rate loan. If you acquired your student debt through a variable rate vehicle, however, you may want to do some research this year on consolidating and/or refinancing those loans.
  • Major Purchases. Higher interest rates will almost certainly add to the cost of major purchases, such as a car, that you make with the help of a loan. But the additional hike is probably not enough to keep you up at night. According to Instamotor, the average American car loan is close to $28,000. Right now, the rate for a 5-year auto loan on a new car hovers below 5 percent. In 2019, you could expect that rate to rise to 5.5 percent. That rate, of course, can climb higher if you have a poor credit rating. If you’re borrowing to make a major purchase in 2019, focus on improving your credit rating. The higher your credit rating, the less you’ll pay over the lifetime of any loan you take out.

Topics: Savings, Investing