Breaking News – Rising Interest Rates Are Affecting Millennials. What are you doing now?
I remember it finally happened 3 years ago after the rate hike was pushed off for months. The Federal Reserve announced a rate hike on a Wednesday afternoon. I’ve been expecting this for a while and wasn’t surprised.
But to this day I have asked myself: How will rising interest rates affect your student loans? Car loans? Mortgage rates?
Well, we will do it, but first we should understand the impact rising interest rates are having on the economy.
You probably already know that an interest rate is the portion of a loan that is charged to the borrower as interest, usually expressed as an annual percentage of the loan outstanding.
At that time, it was the second time since the 2008 financial crisis that interest rates had risen. The Fed’s decision to raise interest rates can affect your housing costs, student loans, car payments, and even the interest rate on your credit cards. Not necessarily immediately, but at some point all kinds of issues will appear.
What Millennials Need To Know About The Federal Interest Rate Hike
Here are some key points for millennials to consider when considering the federal rate hike:
- Rising interest rates signal optimism. In the world of macroeconomics, an increase in interest rates is a sign that the Fed, which oversees the Federal Reserve Banks and is key to executing US monetary policy, has increased optimism about the country’s economy.
- The effect is expected to be minimal. Industry analysts believe the quarter-point rate hike will have little overall impact on millennials and other consumers. Curt Long, chief economist for the National Association of Federal Credit Unions, said recently, “Overall, the impact of a quarter point hike on US households should be minimal.”
- Historically, prices are still low. Remember, there have been few rate hikes in the past decade and since the 2008 financial crisis. The fact is that, despite an incremental increase, current interest rates are still very low and close to historic lows.
How this affects baby boomers versus millennials
Most baby boomers who are likely to retire or prepare for retirement will benefit from rising interest rates. Rising interest rates will increase returns on safe investments popular with retirees, including CDs and money market accounts.
Rising interest rates may not be good for millennials. Mortgages and auto loans are getting more expensive, and many millennials have to make larger student loan payments after federal student loan interest rates increased. But the extent of the pain for borrowers really depends on the force with which the Fed raises rates.
What causes interest rates to rise?
The Fed decides to hike rates as employment in the United States has steadily improved, signaling to them that the economy is strong enough to keep the hike going. In particular, the Fed raised the key interest rate for federal funds from the most recent range between 0.25% and 0.5% to a new higher range: 0.5% to 0.75%.
In order to get technical, banks have to hold a certain amount of money by law. To do this, they usually provide overnight loans to other banks to ensure that these balances are met. The federal interest rate is the interest rate on these very short term loans.
The rate has been close to zero since 2008, between 0.25% and 0.5%, so the economy can come out of a recession … it can only rise. Economists say interest rates will continue to rise in the next few years.
Okay, understand? Does this affect you?
Still, with these general considerations in mind, it is important to understand how the recent rate hike may affect millennial consumers, particularly in relation to the three most common types of loans: student loans, mortgages, and auto loans.
What about student loans? Will my interest rate increase?
Will the dreaded student loan crisis be affected? Well it all depends. The student loan rates are pretty low. As interest rates go up, so do the interest rates on borrowing money for school. Therefore, students looking to take on new debt will consider higher payments as expected interest rates could increase by 1-2% in the new years.
What about the people who currently have student loans? When you have a personal floating rate student loan, the interest you owe will go up. However, most people have student loans at fixed rates that are set by the federal government. So don’t sweat too much.
What rising interest rates mean for mortgages
For qualified buyers, home mortgages have been very important in recent years, with very low interest rates (below 4 percent) on fixed rate home loans. This has contributed to a real estate boom that has benefited both buyers and sellers.
Are you planning to own a house in the next few years? For the most part, the Fed’s rate hike will have little impact on long-term mortgage rates. When the interest rate rises, banks usually find a way to pass the higher cost of borrowing on to consumers.
The average interest rate on a mortgage is currently 4.3%. So if you got a 30-year fixed-rate mortgage on a $ 236,000 home and the loan rate increased another percentage point in 2021, that would add an additional $ 139 per month to the average mortgage. This would add up to $ 50,000 in additional interest over the life of the loan! So if you are thinking of buying a home, act sooner rather than later as the Fed has announced that it will hike rates again in 2021.
On the other hand, you are worried about missing your moment. Rest assured, some industry experts believe the Fed hike will have little or no impact on fixed-rate mortgage rates. Doug Duncan, chief economist at federal home loan company Fannie Mae, recently told USA Today that even if the Fed hiked rates a full percentage point in 2017, the rate on a 30-year fixed-rate mortgage would still be considered reasonably low – between 3.9 and 4.1 percent at the end of the year. That equates to an increase in the country’s average mortgage loan of roughly $ 138 per month – which is probably not enough to deter most buyers in today’s robust real estate market.
What About Car Loans – Is My Interest Rate Going Up?
Auto loan interest rates are expected to rise in 2021, reflecting the federal rate hike. Even if the Fed continues its planned additional rate hikes before the end of the year, industry analysts expect the impact on millennials and others who take out car loans to be relatively minor.
For example, if your typical five-year car loan increases by a quarter percent to 4.25 percent given current interest rates, that means your monthly payment for a $ 25,000 car loan can increase by about $ 3 per month. If the additional hikes proposed by the Fed happen in 2021, the gap could rise to $ 12-16 per month. It’s a bit more cash out of your pocket but probably not a deal breaker for those looking for car loans this year.
No wonder auto loan rates will rise too, right? Auto loans typically only last a few years, so millennials still have time to repay those auto loans. Interest rates are rising. So if you are considering buying a car a few years later, you should probably do so now.
Credit Cards – Will My Interest Rate Go Up?
Of the loans that could be hit hardest by the rate hike, credit cards should be considered. According to CreditCards.com, credit card holders are likely to see interest rates on their card balances spike to roughly the same rate as the Fed’s rate hike. This is because most credit cards have floating rates that are directly affected by the increase. However, since the interest rate has only increased a fraction of a percentage point, the impact on the national average annual percentage (APR) is expected to be minimal.
However, an additional increase in the APR will affect the amount of money you owe when you have outstanding credit card bills. With additional interest rate hikes expected in 2021, if you are one of the 4 in 10 consumers who have month-to-month credit on their cards as you can, consider paying back, or at least reducing, your remaining balance. Getting rid of credit card debt as soon as possible is always a wise financial move – especially now when potential additional rate hikes later this year could have a greater impact on the amount you owe.
Why Rising Interest Rates Can Be a Good Thing
Rising interest rates can have a positive effect on you. If you are an active investor or have a high yielding savings account, rising interest rates means your returns on those accounts will increase too.
What can I do about rising interest rates?
Pay off your consumer debt
No matter how much debt you have, the best option for most is to pay it off.
You can use several different ways to pay off debt. But one of the best options is to use the debt snowball method. That way, you’ll focus on paying off your smallest debts first, and then work your way up to bigger balances. This is a great way to get focus and simple profits first that will motivate you to keep saving and paying off your past debts.
Use rising interest rates to your advantage and keep saving
If you already lead a debt-free lifestyle, take the time to make extra money doing sideline jobs and learn new ways to cut expenses. There are so many money saving apps out there that can save you money automatically.
The bottom line
As you can see, the recent federal rate hike is going to have some ramifications for millennials and other consumers in terms of their credit. Keep making smart financial decisions and don’t sweat too much: the impact should be minimal, especially in the short term.
You don’t have to be a penny pincher, but with interest rates rising – the more you have in your online savings account the more you benefit. Take advantage of it – interest rates affect each of our lives in important ways, but the outcome can vary greatly depending on age.
The best apps to save real money
We talk a lot on the phone, don’t we? Wouldn’t it make sense to save money with the best money-saving apps?