How Rising Interest Rates Can Impact You

Interest rates have slowly started picking up and this will have a huge impact on your personal finances. It will increase the costs of your debt while giving you better returns on your savings.

During the economic recession, the Fed pumped in money into the economy. It kept the banks that were struggling because of high risk mortgage loans afloat by giving huge loans. It also made purchases of mortgage backed securities and kept the money supply in the economy at a high level. The economy seems to be on the road towards recovery and most of the banks were saved.

However, these positive changes have a negative side too as the amount of money circulating in the economy has increased significantly. Because of that, there is a high probability that inflation will rise in the next few months, and when that happens, the Fed will have no option but to increase interest rates to check price rise.

A similar situation was prevalent during early 1980s when interest rates had gone beyond 10%. Currently, the average interest rate for a 30-year mortgage is 5.2%. The current interest rate might be half of the interest rate during 1980s, but home buyers have to pay more now as the price of houses have increased significantly since the 1980s despite the recent crash.

If interest rates increase further, homes could be beyond the budget of many people. This would reduce demand and real estate prices would fall further. Therefore, both buyers and sellers would lose because of an increase in interest rates.

High interest rates will harm anyone who has a huge debt in form of a mortgage loan, credit card debt, and so on. It will also prove to be a problem for those who need to take debt in future for their business, new car or for any other reason.

People who have significant savings in bank accounts, CDs and money market funds will benefit by the increase in interest rates. This will be good news for those who rely on their savings for their post retirement life and had to face the brunt of economic recession.

High interest rates can be dangerous in any economy that has a high debt level. Laws like the CARD Act have been introduced to somewhat reduce the impact by preventing credit card companies to change interest rates for existing debts. But they would not be able to completely nullify the problem of high interest rates.

Speak Your Mind