For much of the past 20 years interest rates have steadily declined. But soaring inflation is not only making virtually everything we buy more expensive; it is likely to make the cost of borrowing money more costly as well. The Federal Reserve at their February meeting decided to keep interest rates near zero but indicated that they would start aggressively fighting inflation starting in March. The primary tool in their financial box is to raise interest rates. The Fed has indicated that they will be raising rates multiple times during the rest of 2022 and most likely well into 2023.
So, what does this mean for consumers as interest rates begin to rise? There are four ways that rising interest rates will impact our pocketbooks almost immediately.
#1 The cost of Home Equity lines will begin to rise.
As the values of our homes have increased dramatically over the past few years, so has the use of home equity loans. Borrowing money inexpensively has allowed many people to pay for home renovations, consolidate debt, educate their children, or just have a source of extra money when needed. Many consumers are unaware that the interest they are paying on home equity lines isn’t a fixed interest rate. The rate can change at any time and will likely immediately begin to rise as the Fed raises interest rates. This will cause the interest only payment on home equity loans to increase.
#2 Car and Home purchases will become more expensive
One of the “side-affects” of the Covid Pandemic is that the normal distribution chain of supplies needed to build homes and manufacture automobiles has been severely disrupted. The result has been a shortage of new vehicles on our local car lots and a severe shortage of homes available in our marketplace. This shortage has cause prices to increase in an unprecedented way. But it is about to get worse. The cost of borrowing money to buy the few cars and homes available will begin to rise due to the interest rate hikes that are coming. This increased cost of borrowing money will make monthly payments increase to a level that many may not be able to purchase a needed car or the home of their dreams
#3 Paying off debt will become increasingly difficult
One of the benefits of the low interest rates we’ve experience in recent years is that many people have been able to get out of debt as more of their monthly debt payments were going to the principal of their loan and less was being paid in interest to the lending institution. But that is likely to change dramatically over the next few months as Credit Card Companies begin raising their interest rates in response to the Fed rate hikes. So more of your monthly payment will go to just paying the interest due on the debt. The net result is it will become increasingly difficult to get out of debt
#4 Fixed rate savings will begin to rise
With inflation squeezing our monthly budgets, interest rates on our debt increasing causing more financial pain, and the stock market in turmoil, good financial news seems hard to come by these days. But there is one piece of good news that will come because of the Fed raising interest rates. As the Fed lowered rates to near zero, the interest rates available at the banks and the yields on short-term bonds have dropped too virtually nothing. This has created a real hardship for retirees and others who depend on earnings from safe money to subsidize social security and pensions in retirement. So, for those who have been able to save money in fixed rate investments, they are about to get some interest relief. They will see the returns on their CD, High Yield Savings Accounts, checking accounts, and short-term bond portfolios increase. This is good news for those who are retired and struggling to make ends meet due to the increase in cost of daily goods and services because of inflation.
So, what should we as consumers do because of rising interest rates? The most important thing is to realize that the sky isn’t falling. We may experience some short-term pain, but our economy has proven repeatedly that it is resilient because of the strength of the American people. We’ve endured the Dot-Com bubble bust of 2000, the financial crisis of 2008, several recessions, and a host of less dramatic financial struggles since the turn of the century. Not only have we endured but we have thrived after each challenge we’ve faced. The financial challenges because of Covid, such as inflation and rising interest rates, are no different. We will not only survive these difficult financial times but will come out stronger in the end. Let’s make the best financial decisions for ourselves and our families that we can, take it a day at a time, and be thankful for the many blessing we have.