What’s the Big Deal with Interest Rates? 3 Ways You Will Feel Changes

September 4, 2019

Markets go up. Markets go down. We’ve seen interest rates increase and we’ve seen interest rates decrease. Let’s assume you are not a big purchaser of Treasury Bonds – why would interest rates matter to you?

The on-going saga of interest rates around the world continues to lead headlines across news outlets. With buzz words, clichés, and wild projections, the rhetoric remains pinned to the macro functions – the Federal Reserve, the Fed Funds Rate, and Treasury Bond Yields. But what are the impacts at the micro-level? More importantly, what changes will you feel?

Spending

The Annual Percentage Rate (APR) charged for carrying a balance on a credit card floats with the prime rate.  With rates falling, the cost for carrying a balance with these cards declines, meaning smaller or fewer payments.

Borrowing

Much like a credit card, variable-rate mortgages or lines of credit will fluctuate with broad interest rates. Determined at the time of issue, fixed mortgages keep the same terms until maturity. For home buyers looking to finance (or re-finance) their house, it’s more affordable when interest rates are low.

Similarly, paying for college is also cheaper. Federal student loan rates are set based on the 10-year Treasury note each May. Like a fixed mortgage, the issued rate is stated for the life of the loan. With the exception of private education loans, a sharp drop would not impact existing rates. Private loans may fluctuate as they are often tied to the LIBOR rate.

Saving

The interest you receive from your bank on the money you save with them moves up and down as well. For years, savings accounts have paid next to nothing. This started to change as rates rose – and of course, reversed as rates fell.

High-interest rates are good for savers. Low-Interest rates are good for spenders and borrowers. They directly impact choices, decisions, and the consequences of daily life, even at a more individualized scale. Give your BDF team a call to chat about your specific situation.

Josh Larson is an Advisor at BDF and sits on the firm’s Financial Planning Committee, which is responsible for educating the BDF team on financial planning topics and improving the team’s processes to ensure each client benefits from proactive, best in class financial advice. He studied at Aurora University and earned degrees in Accounting and Business & Commerce. Josh is a CERTIFIED FINANCIAL PLANNER™ professional.