5 Things to Consider When Rates are Low
Paying off debt can be exhausting. It’s already overwhelming to take out a $10,000 loan, for example. But you also have to pay interest on that $10,000. Over the years, that interest means you could end up paying hundreds or even thousands of dollars more than you originally borrowed.
There’s no easy way to say it—higher interest rates make paying off debt more difficult.
The good news: Due to some recent activity from the Fed, it might be possible to lock down lower interest rates than what you may currently be paying.
In July, the Federal Reserve Bank (aka “the Fed”) lowered the federal funds rate for the first time since 2008. The Fed’s lower rate can indirectly affect Americans’ interest rates on credit cards, personal loans, student loans, and mortgages—if borrowers take the appropriate actions.
So what are the advantages of a lower rate environment? Everyone’s financial situation is different, so always consider what works best for you. The following is not meant to be financial advice, but rather a few questions that may help you as you consider your next possible move.
1. Should You Consolidate for a Lower Rate?
Maybe you’ve already acquired a bit of debt and have been utilizing a credit card (or two or three). How can you take advantage of the Fed’s rate changes?
First, you might consider consolidating your debts. Let’s break down what that means.
You take out a debt consolidation loan to consolidate the current debt you are building with your credit cards. Credit cards often come with high interest rates, however a debt consolidation loan takes your current credit card interest rates and combines them into one new loan with a new interest rate. Depending on your situation, this new rate may be lower than the rate you are currently paying on your debt.
Here’s why having one loan to pay instead of multiple credit cards might be easier. When you have multiple credit cards, not only do you have to keep track of all your monthly payments, but if the entire balance is not paid off by the end of the billing period, you also accrue interest on that balance.
Keeping track of all the monthly payments can already be tricky. But when you add interest to each one, the debt can be staggering. By consolidating, you only have to keep track of the payments on one loan, rather than multiple cards with varying interest rates.
One way to figure out if this move might make sense for you is to look at the credit cards (or other types of personal debt) you’re hoping to consolidate. Calculate the average interest rate you’re paying between all of them.
When you consolidate, you want to make sure the new interest rate is lower than this average to verify that it’s a good idea. Another approach could be to look at the interest rate on your current debt and compare it to the interest rate on your new loan. Rather than consolidating all of you debt, you might consider consolidating the debt with higher interest rates. The important thing is that everyone’s circumstances are unique and you should consider all of the options.
The interest rate on a new loan can typically be either a fixed or variable interest rate. If it is fixed, the interest rate remains unchanged right up to the day you make your final payment. Because the Fed rate is relatively low, it might make sense to lock down a low fixed rate if you can qualify for one.
Variable rates fluctuate along with the market. Specifically, variable rates are usually tied to an index like the LIBOR , which is a benchmark used worldwide to determine interest rates. The LIBOR rate is not one to one with the Fed rate, however they do have a close relationship. This means that if the Fed raises its rate later, your variable loan rate could increase. However, variable rates usually start lower than fixed rates, so if your goal is to pay off your debt super quickly, you might be able to take advantage of a variable rate.
That being said, if you only have a few payments remaining on your existing loan, then it might not be worth consolidating. You might want to consider whether the time spent consolidating is worth the amount of savings you may receive.
An additional consideration when it comes to consolidating are the upfront fees. Some lenders may charge fees that are often hidden in the fine print, so be sure to do your research and determine exactly what consolidating will cost you. SoFi offers absolutely no fees with their consolidation loans, so if you do decide to consolidate, you won’t be hit with any surprises.
Remember that everyone’s financial situation is different, and what works for one person may not work for everyone. Consolidating your debt is only helpful if you adopt good financial habits and stay on track with your payments to ensure you’re working towards financial freedom—not additional debt. Talk to a financial planner to help figure out what makes sense for you.
2. Is This the Time to Take out a Personal Loan?
The option of taking out a personal loan may have been in the back of your mind for a while. Do these rate changes mean it’s the right time for you?
The short answer: possibly.
The slightly longer answer: A low Fed rate does mean initial personal loan rates have the potential to be lower. But that is not all that goes into what rate you might get for a personal loan. Lenders look at other factors when determining your loan interest rate, such as your credit score, among other things.
So is it the right time to take out a personal loan? It does all depend on your personal situation, and whether you are willing to face the risks associated with taking on additional debt.
Are you feeling good about your finances and ability to pay off a loan in the future? Then with the rate lower than it has been in years, this might be a good time to take out that personal loan you’ve been thinking about. Afterall, the holiday season is just around the corner.
Though you’ve hopefully been budgeting for it, unplanned expenses can always arise. A personal loan could be a way to help pay for other purchases that may be necessary in the fall and winter months.
3. Is It Time to Refinance My Student Loans?
If paying off several credit cards is like taking a full load of college courses, then making payments on multiple student loans can feel like adding an internship, two part-time jobs, and extracurricular activities to the mix.
Do you have federal loans or private loans? Maybe you have both. On those private loans, is the rate fixed or variable? Oh, maybe you have two private student loans, one with a fixed rate and one with a variable rate.
How are you supposed to keep track of all this, let alone make any real headway paying off the principal on your loans?
Refinancing could help simplify things.
By refinancing student loans, you’d take out a brand new loan through a private lender, and this loan has a new interest rate. If you have both federal and private student loans, refinancing may allow you to lump them all together so that you only pay one loan with one interest rate and make one monthly payment. Much easier, right?
This is where the Fed’s lower rate might come into play. If you can refinance while rates are low, and you qualify for a lower rate, you typically have the option to choose a fixed rate to lock down that low interest for the duration of your loan.
Of course, you may choose a variable rate. As with credit cards, variable rates typically start lower than fixed ones, so if you think you can pay off your loans fairly quickly, variable might be the way to go.
Yes, refinancing can be a game changer. But keep in mind that if you have federal loans, you might lose out on multiple benefits that come with federal loans.
For example, you can’t refinance your federal loans and stay in the Public Service Loan Forgiveness program and you won’t be eligible for any federal income-driven repayment plans. However, you can consolidate your federal loans into a federal Direct Consolidation Loan and retain your federal benefits in certain cases.
It is also important to remember that there are also some risks associated with taking out a variable rate loan. Since variable rates are usually tied to an index like the LIBOR , your rate is subject to changes. Your monthly payments could go up unexpectedly, as well as the amount of interest that you’re accruing over the lifetime of your loan.
4. Should You Refinance Your Home Loan?
Last but not least: home loans. The relationship between mortgages and the Fed rate is tricky because the Fed rate doesn’t directly affect mortgage rates. Instead, home loan rates are more closely impacted by the 10-year Treasury yield.
But the Treasury rate and Fed rate are determined by a lot of the same economic factors, so when the Fed rate is low, there’s a good chance home loan rates will start to dwindle, too—but that isn’t always the case.
Plus, home loan rates had already been steadily decreasing before the Fed lowered its benchmark rate in July. (Although average mortgage rates did slightly rise in mid September back to mid August levels.)
If you’ve already taken out a mortgage, what do these rate changes mean for you? Depending on your situation, it might be time for a mortgage refinance review.
When you refinance, you can typically choose between a fixed rate and an adjustable-rate mortgage (ARM), which is a loan with a variable rate. As with other types of loans, ARM rates start lower than fixed rates but can fluctuate along with the economy.
Even with the recent blip upward, overall home loan rates have been steadily decreasing, so if you continue waiting, you could snag an even better deal. However, timing the interest rate market is a difficult thing to do even for those who follow market trends. Some consider it a good idea to review your mortgage terms while rates are low to see if you can improve your financial situation.
5. What Could You Do with the Money You Save?
If you take one or more of these steps and save money by paying lower interest rates, what should you do with the extra cash in your pocket? You have some options.
Paying off Your Debts More Quickly
Not paying as much on interest? You can still put that money toward your loans. We know this isn’t the sexiest option, but hear us out!
Let’s say you’ve been paying $300 toward your student loans each month, but $24 has been going toward the interest. Now you’ve refinanced for a lower rate, so you’re only paying $9 in interest per month.
You can still pay $300 every month, but you could put the extra $15 toward your principal, not the interest. This means you could pay down an extra $180 of your principal in a year.
Preparing for the Holiday Season
Kids. Parents. Siblings. Your special someone. The number of gifts to buy for the holidays can quickly stack up.
In 2018, 46% of shoppers used a credit card to pay for their holiday shopping. Wouldn’t it be great if you could minimize credit card debt?
The extra money in your wallet doesn’t necessarily mean you should spend more on gifts this year. (Although, depending on your situation, you may decide that’s how you want to spend it.) It simply means that now, with a little more money to spare, you can buy gifts without putting a strain on your wallet or going further into debt.
How many of us have said, “Man, if I were rich, I’d travel the world?”
By spending less money on interest, you might be able to cross a couple items off your bucket list. You may choose to spend a long weekend camping in a nearby state park.
Or you could stash away money over the course of several months and book that ticket to Greece you’ve had your eye on.
Saving for the Future
How much money are you saving each month by paying less in interest? Crunch the numbers and consider putting that amount in a retirement account each month. Thanks to the magic of compound interest, a retirement account is a place to invest for the future.
You don’t have to choose a retirement account. You could put money in a savings account or add cash to your emergency fund so that you’ll have something to lean on if your car breaks down or your insurance doesn’t cover quite as much of that medical bill as you expected.
There are a lot of options for what to do with this extra money! In fact, two or three of these choices may have caught your eye.
Keeping track of all your financial goals—debt payments, holiday spending, travel, savings—might seem hard. The SoFi product suite via the SoFi app can help you track your financial goals so you can decide if you’re putting that extra money to good use.
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