Interest Rates Are Low as Hell. But Do Your Homework Before You Make Any Decisions.

In this edition of "Bank of Dad" our columnist offers some perspective on low interest rates and what they mean for your credit cards, mortgage, savings account, and student loans.

by Daniel Kurt
Originally Published: 
Geo Barnett for Fatherly

Hey, Bank of Dad. Interest rates are falling. What does this really mean for me? Like, how does this affect my money? I have a few credit cards, a mortgage, car payment, some savings accounts; we also still have my wife’s student loans. Is there a best way to react or things I can do to make sure everything is safe and sound? — Jason, 34, Reno, Nevada

That’s a great question, Jason. Interest rates have been crazy low for a long time now, and it looks like the Fed may not be done trimming a key rate that affects a lot of consumer loans. While you certainly don’t want to overreact to short-term economic changes, it’s smart to ask how this might impact your financial life.

With that said, here’s a little roundup on how the products you mentioned may or may not be affected.

How Low Interest Rates Affect Credit Cards

Last month, the Federal Reserve cut the influential federal funds rate for the first time in 11 years. Keep in mind that those changes will tend to affect variable-rate products the most. That means you may eventually see a change in your credit card finance charges, which fall into this category.

The question is how much that really affects your borrowing habits. Even with a quarter point cut in July (and some experts expect a similar move in September), charging your purchases is still extremely expensive. A survey by the website found that the average rate dipped to 17.74 percent after the Fed’s rate-cutting decision last month. That’s still a very expensive way to pay for things.

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How Low Interest Rates Affect Mortgages

Mortgage rates were already pretty good last fall, when the average 30-year fixed loan charged around 5 percent. Since then, they’ve gotten even better. This week, the average rate for those mortgages is just 3.81 percent, according to Bankrate.

If you haven’t looked at your mortgage situation recently, you might give refinancing some thought. Of course, that all depends on what you’re already paying. If the difference in rates is a quarter of a percentage point, forking over 2 to 5 percent of your home’s value in closing costs might not be worth it.

But if you can save a couple hundred dollars a month in financing fees, you might want to give your broker a ring — especially if you plan to live in your home for several years, allowing you to more than recoup those transaction fees.

How Lower Interest Rates Affect Car Loans

The cost of car loans was actually edging upward, before taking a slight — and I mean slight — dip in July. Now the average rate on a five-year new car loan is 4.63 percent. For most folks, the Fed’s money-loosening policies alone aren’t going to justify refinancing your loan.

One scenario where you might want to refi is if you have several years left to pay on your current loan and you’ve managed to resurrect a credit score that was pretty crappy when you bought the car. Borrowers with an excellent FICO rating pay, on average, about 3.5 percentage points less than borrowers with scores under 650.

How Lower Interest Rates Affect Savings Accounts

The federal funds rate and the interest rate on savings accounts are like Mitch McConnell and wealthy Russian investors — they’re tight. So, when the Fed lowered its rate last month, banks pretty much moved in lock step.

Even higher-yielding banks, like Marcus and Ally, cut their rates to 2.15 percent and 1.9 percent, respectively. But you know what? Those online accounts are still a pretty great place to put money that you may need access to quickly. They’re a lot more generous than traditional savings accounts, which yield next to nothing these days.

How Lower Interest Rates Affect Student loans

Federal student loans are fixed, so your wife’s rate won’t drop just because the central bank lowered its rate. (Federal loan rates are set in May for the upcoming school year, so even students heading to campus this fall won’t be directly impacted).

However, private loans are a whole different ballgame. Those are generally pegged to the Libor, which is sensitive to Fed maneuvers. If you have a variable-rate private loan, you could start to see some relief, although it can take a while for lenders to make adjustments.

It might also be a good time to consider refinancing, especially if the rates you would qualify for today are more than a full percentage point lower than the loan you already have. But think long and hard before refinancing your federal loan into a private loan. Getting a better rate might sound appealing, but you’ll lose certain repayment options and consumer protections that you only get with a government-backed note. And once you refinance, there’s no turning back.

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