Last Wednesday, the Federal Reserve announced an interest rate hike from 2-2.5% on consumer and business loans. Aside from that, the Fed expects to implement three more rate hikes by 2019.
The recent announcement from the Fed Reserve affected millions of Americans as their borrowing costs increase. The said rate hikes create a domino effect as the rates on mortgages, home equity lines, and credit cards also increase. All the other revolving loans with variable rates are also affected directly by the Fed’s latest move. The experts say this will result in increasing the Americans’ monthly payments.
According to MagnifyMoney co-founder Nick Clements, the interest rate hike is rewarding for savers, though, as they get to enjoy higher potential returns on their investments. Clements expects the Fed’s latest move will increase the savings rate of bank customers who are starting to get decent returns in their savings and investment accounts.
Clements adds the consumers should expect the rates to continue to go up. He also advised if you’re in debt, you should lock your loans in the lowest rate possible to avoid getting affected by the impending rate hikes by next year. The monthly payments for auto or car loans could also increase due to the hike.
However, Clements noted some car buyers didn’t feel the impact due to auto dealer incentives. The effects on 30-year mortgages as well as the other long-term goals will also be subdued.
THE EFFECTS ON CREDIT CARDS
Clements says the interest rates on credit cards, adjustable-rate mortgage, and HELOCs will most likely be affected by the rate hikes. According to the financial experts, availing of these loans will be more expensive since their interest rates are tied to the prime rate.
The prime rate is greatly affected by the Federal Reserve’s benchmark rates. According to Bankrate’s latest report, the average credit-card rates amounts to 17.31%. So if you have a $10,000 credit-card balance, you may need to add $2 a month to your minimum monthly payments due to the recent quarter-point hike.
The cumulative effects of the recent hikes, plus the other eight previous ones will cost you a total increase of $16 per month. And it’s about to get more expensive as we enter 2019 according to Greg McBride, the chief economist at Bankrate.
Meanwhile, the home equity lines of credit have a much lower rate at 6.07%. But if you have a $30,000 credit line, your minimum monthly payment will be up by $6.25 per month. In contrast, the impact on adjustable-rate mortgages can only be felt once due to its annual modification scheme. The mortgage rates this year increased up to 3.92%. So if you have a $200,000 adjustable-rate mortgage, your monthly payment could increase by $50.
The new quarter-point rate hike is likely to be applied to new auto loan applications according to Bankrate. This means your monthly payment rate could increase by 43 if you avail a $25,000 car loan.
Despite the changes, Tendayi Kapfidze of LendingTree says these increased rates are likely to get offset since most auto manufacturers give frequent discounts and incentives to encourage car sales. Meanwhile, the five-year auto loan rates are still low at 4.8%.
BANK SAVINGS RATES
Since most banks have higher rates for loans, they have the leeway to pay higher interest rates on their customers’ bank deposit accounts. However, don’t expect to feel the immediate returns for your accounts soon since the interest rate is typically at 1% or less.
However, the bank customers can now benefit from a bigger margin in loan earnings due to the higher interest rates. This means bank customers now enjoy higher earnings on their deposit and savings accounts as well as their money markets mutual funds, since the potential returns now border up to 2.5%, and it’s anticipated to go higher as we enter next year.