The December rate hike by the Federal Reserve is a small step toward interest rates returning to a more normal level. Though rates have remained low for years, the Fed has been slowly increasing rates for the past couple years. Rates are still low from a historic standpoint, but more increases are expected in the coming years. Even a small increase of 25 or 50 basis points can result in a significant change in the amount of a monthly payment for a home or vehicle. Even worse is the increase in total cost of a purchase over the life of a loan.
Consumers who currently have variable interest rate loans should take action to lock in rates at their current level. In most cases, fixed rate loans will have higher interest rates than variable rate loans. However, today’s low fixed interest rates will likely end up being lower than variable interest rates in the future. Many mortgage lenders will even switch loan types from variable to fixed with little cost or effort on the part of the consumer.
Auto loans are typically have fixed rates instead of variable. However, interest rate changes will also impact consumers who have auto loans. Those who may be trading cars or buying an additional vehicle in the near future may want to act quickly. As with other forms of loans, auto loan interest rates will also be impacted by Fed rate hikes. Though car manufactures are still competing with each other to keep vehicle costs low, loan costs are a significant part of the total cost of any vehicle purchase. This is especially true for buyers with less than perfect credit as they pay higher rates than those with better scores.
Credit cards are one of the most expensive forms of borrowing. Credit card companies charge rates far in excess of what mortgage and auto loan lenders charge. For example, many mortgage and auto loans are around 5%, while the average credit card rate is about 15%. Though a move of ¼ to ½ of a percent is not a significant change on a credit card rate, the change still will impact a borrower’s ability to pay off the card’s balance.
Though it is almost always a good idea to pay off debt as quickly as possible, consumers need to take action now to avoid the higher costs of borrowing that appear imminent.