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What do Rising Interest Rates Mean for Consumers?

Contributed by: Heath Combs

Federal_Reserve_BuildingWhen the Fed met in June, it raised its target federal funds rate for the second time this year and the sixth time since December 2016. And an additional one to two increases are expected by the end of 2018, signaling the Fed’s confidence in the U.S. economy. While the federal funds rate only directly affects lending institutions, the impact of the Fed’s actions trickles down to individual consumers.

So how will the Fed’s recent actions affect you? Let’s find out. But first here’s a little background on the federal funds rate and how the Federal Reserve System decides whether to increase the target rate.

What is the federal funds rate?

The federal funds rate is the interest rate lenders charge each other for providing overnight loans to meet the reserve requirements established by the Federal Reserve. The Fed’s Federal Open Market Committee (FOCM) meets eight times a year to set the target federal funds rate after evaluating the current economic data. Technically, the Fed doesn’t determine the rate at which financial institutions must lend to each other. The institutions negotiate those rates among themselves, but lenders typically meet the target.

During times of strong economic growth, the Fed generally increases the target rate to keep inflation under control. For example, when the real estate market heated up in the early 2000s, the Fed raised the target federal funds rate 16 times from June 2004 to June 2006. On the other hand, during tough economic times, the Fed typically decreases the rate to stimulate economic growth. So, when the real estate market started to cool and the housing bubble burst, the Fed decreased the target rate nine times from September 2007 to December 2008. By December 2008, the rate was down to .25 percent, and the Fed didn’t increase it again until December 2015.

What is the prime rate?

When the federal funds rate increases, it costs lending institutions more to borrow money from each other. Lenders, in turn, often pass the extra cost on to consumers in the form of higher interest rates. Prime rate is the interest rate lenders charge their most creditworthy customers. It’s not determined by the Fed, but by individual lending institutions. And the prime rate impacts the interest rates consumers are charged on everything from credit cards to auto loans.

How do rising rates impact consumer accounts?

As the prime rate increases, interest rates for credit cards, auto loans, personal loans and lines of credit, home equity loans and lines of credit, and adjustable rate mortgages (ARMs) typically increase as well. The prime rate has little direct impact on fixed rate mortgages, which are more closely tied to other economic indicators such as inflation. But interest rates on fixed mortgages have also increased since the beginning of the year.

On the flip side, you may see an increase in the amount of interest you earn on your savings accounts or certificates of deposit (CDs) as interest rates rise.

How will increasing rates impact your budget?

If you already have a fixed-rate loan, these changes won’t impact the terms of your existing loan. But if you’re thinking about getting a new loan or line of credit, you’ll likely need to prepare for higher interest rates and larger monthly payments since rates are predicted to continue increasing.

For example, if you take out a home equity loan for $80,000 with a rate of 4.75 percent and a repayment period of 10 years, you’ll pay $20,653.97 in interest over the life of the loan. But if interest rates increase by just 25 basis points to 5.00 percent, you’ll pay an additional $1,169.10 in interest for the same $80,000 loan over a 10-year period.

Another factor to consider is the impact of rising interest rates on your payments for variable rate products such as ARMs or home equity lines of credit. Because rates for these products are tied to the prime rate, your payments will likely increase soon, so now’s the time to make room for larger payments in your budget. Or you may want to consider refinancing into a fixed rate product with predictable monthly payments. And if you use credit cards but don’t pay the balance in full each month, be prepared for higher minimum monthly payments.

How will these changes impact your credit scores?

As interest rates and payments for variable rate products increase, it’s important to consider your ability to repay your loans. While rising interest rates won’t directly impact your credit scores, your ability to repay your bills on time will. If you’re unable to make your payments on time or the amount of credit you’re using is too high compared to the amount you have available, it may have a negative impact on your credit scores.

If increasing interest rates mean you won’t be able to make your payments consistently, consider talking to your lender right away. They may be able to modify your existing loan or set up alternate payment arrangements to help you repay your loan.

How long will rising rates last?

Many experts believe we’re in a rising rate environment that will last for the next couple of years. While it’s impossible to predict the future, current indications suggest it’s likely interest rates will continue to rise unless the economy shows signs of weakening or the rate of inflation slows.

With that in mind, if you’re thinking about taking out a loan, it’s likely you’ll get lower rates now than if you wait. But remember that the interest rate is only one factor to consider when deciding whether to get a loan and how much to borrow. If you can’t make your payments on time, it doesn’t matter how low the interest rate is. So, before you sign on the dotted line, be sure to review your budget to determine whether you can afford the payments.

To find out how different interest rates will affect your payments, check out our financial calculators.

While rising rates are a hot topic in the news right now, the impact of the Fed’s actions will vary greatly from person to person based on their individual financial situation. For example, if you have a variable rate loan and you max out your credit cards each month, the impact to your bottom line may be significant. But if you have fixed rate loans and you pay your credit card bill in full each month, you may not even notice the changes.

If you’re interested in taking out a loan or refinancing your variable rate product into a fixed rate loan, set an appointment with one of our specialists at, or call us at 855-293-2957 to get started.





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