So much has changed in the past few years, and our economy is feeling the effects. Inflation is at a forty year high, causing everyone to scrimp and save now more than ever before. And now the Fed is raising interest rates to boot. Why now, and what does this increase in interest rates mean for you?
To understand why the Fed is raising interest rates, we need to talk about inflation. Inflation is the increase in the price of goods over a period of time. It is natural, and it can be a good thing for an economy. Most economists believe that a little inflation signifies healthy supply and demand in an economy. Healthy inflation typically hovers around 2%.
Our current inflation rate however is around 8%, quadruple what it should be. And this means the price of everything is increasing quickly.
Why is this? Well there are a few reasons, and many of them have to do with the effects of COVID and worldwide shutdowns. Some of the reasons for current inflation include:
Supply chain issues: When materials are scarce, the price of production increases.
Rising wages: Wages have been increasing to attract more workers, leading to an increased cost of production.
Government regulations: Tariffs and other expenses can cause an increase in production cost.
Change in exchange rate. The dollar has less buying power now compared to the rest of the world.
New technology and marketing. New tech and new marketing techniques create increased demand.
Growing economy. When the economy is growing and people have more money in their pockets, demand can outpace supply.
Expanded money supply. If the Fed prints more money at a higher rate than the economy is growing, the money loses its value and inflation rises.
When all of these factors hit at once, inflation balloons and outside intervention is often needed. That’s where the Fed comes in.
By raising interest rates, the Fed is aiming to cool down inflation. Consumers will ultimately spend less when the cost of borrowing is high, which will reduce some of the demand that is putting too much stress on the supply side of the economy.
The Fed initially raised rates in March, and just raised them again in early May. There are more rate hikes expected, and the federal funds rate is expected to exceed 3% by 2023.
The Fed has been raising the Fed funds rate, which is used as a benchmark for other interest rates. Let’s look at what will be affected by this increased rate.
When the Fed funds rate increases, the prime rate increases as well. And this rate affects your credit card APR. Credit card rates have been around 16%, but will most likely rise to 17% by the end of the year. Swiping your card will therefore cost you a bit more moving forward.
Credit card companies are required to give you 45 days notice of any rate increases, so keep your eyes peeled for any news. Credit card interest is compounded daily, which means it can add up very quickly. Credit card debt can very easily snowball and become unmanageable.
The rising Fed funds rate means that borrowing money will become more expensive. Personal loans, student loans, and mortgages will all see increased interest rates. In fact, after the first Fed rate increase in March mortgage rates rose above 5% for the first time in over ten years. And since the rates are increasing again, these rates will only increase.
On the flip side of this, saving money may be more rewarding with the increased rates. Because with the increased Fed funds rate,the interest earned on savings also increased. In 2021, Certificates of Deposit (CDs) earned just .13% interest annually. Experts believe that this will increase to the 1% mark. This is pretty significant: a $10,000 CD would now earn you $100 in interest as opposed to $13 in interest.
Increased rates, simply put, means that borrowing money will be more expensive, but saving money will be more rewarding. Here are our top tips for navigating the increased rates of 2022.
When times are uncertain, the last thing you want is for debt to hang over your head, especially if it is variable. Commit to paying down (or paying off) your current debts so that you do not need to worry about increasing interest rates. If you have multiple debts, prioritize the variable debts with the highest interest rates.
If you are unable to pay off your debts, consider consolidating them. Variable rates are susceptible to high APR increases, so consolidating them into a fixed rate personal loan may be a good option. This will help you lock in an interest rate for the duration of your repayment period.
Mortgage rates will increase over the next year, so if you have not refinanced your mortgage in the past few years, consider doing so now. Rates are still relatively low right now, but will likely increase significantly by the end of the year. If you have a variable rate, you should prioritize refinancing to a fixed rate so that you will have a predictable payment.
While the Fed funds rate does affect what APR you will be offered, it is not the only factor in your interest rate. Your credit score is incredibly important when it comes to financing. Prioritize increasing your credit score to ensure that you can get the best rates possible. Easy ways to improve your credit score include:
Making full, on-time, consistent payments (or consider setting up autopay, if possible)
Pay down your debts to improve your credit utilization ratio
Hold off on opening any new accounts to avoid hard credit inquiries
Request higher credit limits
Check your credit report and dispute any errors
Commiting to an improved credit score can save you a lot of money when it comes to interest.
While interest rates are increasing, the competitive nature of the car loan business means that car loan APRs tend to not react as drastically to the Fed funds rate as other industries. But experts still suggest refinancing your car loan now so that you will be prepared if the rates do increase.
This means that now is a perfect time to look into car refinancing. You can save a lot of money by refinancing to a lower car loan APR or by shortening your repayment period, which will save you a lot in interest payments. If money is a little tight, you can refinance to a longer repayment period so that your payments are more spread out (and therefore lower), but take note that you will end up paying more money over the life of the loan.
If car refinancing sounds like a good option for you, it is super simple!
Make sure your credit score is in top shape. Follow our tips above to ensure your credit score is as good as possible.
Research different lenders and short list your top choices. Read reviews and talk to others to determine where you might be able to get the best rates and terms. Consider traditional banks, online lenders, and credit unions.
Gather your paperwork. You will need the information from your previous loan, as well as your vehicle information and financial information.
Apply and compare. Apply to four or five different lenders and compare the offers as they come in.
Decide and sign. When you choose which deal is best for you, just fill out the paperwork and sign on the dotted line!
You can make car refinancing even easier by using a company that specializes in refinancing like Auto Approve. Our experts can help you submit your applications and select which offer is the best for you. We have relationships with lenders all over the country, so you know we can find you the best deals possible. We even handle the paperwork so you don’t have to (including the DMV). Car refinancing has never been so easy!
Interest rates are guaranteed to rise more as the year goes on, so it pays to be prepared. Focus on improving your credit and saving what you can, while putting off any major purchases until the rates decrease. Consider consolidating debt and refinancing your loans to get yourself in a better financial situation.
If car loan refinancing is on your to-do list, contact Auto Approve today to get started. It can save you a lot of money (like hundreds if not thousands of dollars!) So get your free quote today!