What do rising interest rates mean for your finances?

The Fed announced its first rate hike since 2018. What does that mean for your finances?

Today, many consumers are already feeling squeezed by higher prices at the pump, rising costs on daily goods, and trips to the supermarket. And now that interest rates are ticking higher, the cost of borrowing—from credit cards and car financing to private student loans—may increase, too.

On Wednesday, the Federal Reserve raised its benchmark rate by a quarter percentage point (0.25%) as it tries to rein in inflation, which is at a 40-year high. For now, consumers may feel the sting of higher prices more acutely than the pinch of just a quarter-point bump. However, this week’s rate hike looks to be the first of multiple rate hikes to follow, leaving many people asking, “what does that mean for my finances?”

This overview highlights several areas where you may be impacted by rate hikes.

Rising borrowing costs overall

By raising its federal funds rate — the rate banks charge one another for overnight loans — the Fed sets off a ripple effect. Whether directly or indirectly, this means that an array of borrowing costs for consumers will go up.

Car loans

Prices for new and used vehicles have skyrocketed so much in the past year that interest rates may seem like an afterthought. However, these rates are expected to rise, too.

The average interest rate on new car loans was 4.39 percent in February, relatively flat from a year ago, according to Dealertrack, which provides business software to dealerships. The average for used vehicles was 7.83 percent in February, down from 8.25 percent.

Car loans tend to track the five-year Treasury, which is influenced by the federal fund rate. However, that’s not the only factor in determining the rate you’ll pay.

The rate a borrower qualifies for depends on credit history, the type of vehicle, the loan term, a down payment and other factors. Borrowers with poor credit scores may pay 20 percent or more, while those with pristine credit might qualify for rates closer to zero.

Mortgage rates

Mortgage rates don’t necessarily move in parallel with the federal funds rate, but instead track the yield on the 10-year Treasury bond, which is influenced by inflation and how investors expect the Fed to react to it.

Some expect the 30-year fixed rate mortgage to tick higher this week, as it continues to be pushed upward by inflation. However, rates still remain rather low by historical standards.

Federal student loans vs. private student loans

Federal student loan borrowers are not impacted by the hike because those loans carry a fixed rate set by the government. (Currently, federal loan payments and interest accruals remain paused until May.) That said, new batches of federal loans are priced each July, based on the 10-year Treasury bond auction in May.

Private student loan borrowers, however, should expect to pay more on both fixed and variable rate loans, which are linked to benchmarks that track the federal funds rate.

Variable loans will generally move higher first; but, private lenders will begin to price additional expected increases into their new fixed-rate loans and borrowers will soon feel the ripple.

Savings accounts and C.D.s

An increase in the Fed benchmark often means banks will pay more interest on deposits. Perhaps, thankfully, many people saved extra money in their bank accounts during the pandemic, but whether rate increases will translate into a more attractive yield depends on the type of account you have and the institution you do business with. Larger banks are less likely to pay consumers more, though online banks have already started raising some of their rates.

Smaller banks will pay better rates more quickly than larger institutions and some of them — particularly the savings arms of credit-card banks, such as American Express and Capital One – have already begun increasing their rates.

Certificates of deposit, which tend to track similarly dated Treasury securities, have already begun to move a bit higher, particularly among online banks: the average one-year C.D. at online banks is 0.67 percent in March, up from 0.51 percent in January, while the average five-year C.D. is 1.08 percent, up from 0.86 percent in January.

There’s likely more to come

This week’s rate hike is poised to be the first in a series of anticipated increases, and experts predict consumers probably won’t feel the bite too severely until several rate increases are in place.

Want to discover how these rate hikes could impact your portfolio and financial goals? Contact us today to schedule a consultation appointment.

Important Disclosures
*Past performance is not an indicator of future results. This material is not financial advice or an offer to sell any product. The statements contained herein are solely based upon the opinions of Elevage Partners, LLC (“Elevage”). Elevage is a registered investment adviser. More information about the firm can be found in its Form ADV Part 2, which may be requested by calling (877) 922-8243 or visiting http://www.adviserinfo.sec.gov. The information contained herein is derived from sources we believe to be reliable, but which we have not independently verified. Elevage assumes no responsibility for errors, inaccuracies or omissions in this information. Elevage reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. The information provided in this report should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive. It should not be assumed that any of the securities transactions, holdings or sectors discussed were, or will prove to be profitable, or that the investment recommendations or decisions Elevage makes in the future will be profitable or will equal the investment performance of the securities discussed herein.ELV-17-02

Leave a Comment