How the Federal Interest Rate Changes May Impact You
This article contains breaking news and events related to the current state of politics and the economy. While we try our best to keep our articles as up-to-date as possible, the ongoing effects of COVID-19 are happening in real time and information is subject to change.
Earlier this month, the Federal Reserve announced the lowering of interest rates to near-zero levels in response to the COVID-19 crisis.
As the impact of these rate cuts, as well as the broader implications of the current crisis, have started to unfold, we wanted to provide an update and address some commonly asked questions about what this interest rate change could mean for you.
Why did the Fed lower interest rates so drastically?
The Fed took an extraordinary step by lowering interest rates this much. It said it took such action to “support the flow of credit to households and businesses.”
This emergency move enables the Fed to try to shore up the economy which is getting hit hard by the COVID-19 crisis. The results could impact individuals’ personal finances, enabling them to save money on mortgages, credit cards, and many other loans.
The Fed took similar emergency action back in 2008 during the financial crisis as a way to try to rein in the markets and prevent the economy from taking a further nose-dive.
It seems the Fed is taking such action this time around for similar purposes—but it’s taking action quicker during this crisis to try to get in front of it as much as possible.
The Fed said it, “expects to maintain this target range until it is confident that the economy has weathered recent events.”
Is now a good time to refinance existing loans?
Since the Fed has lowered interest rates, this is a question many people have been asking. The answer is, it depends.
In normal economic conditions, when interest rates fall it usually makes refinancing a good option in order to secure lower rates than those that were available when you took out your original loan.
But these are not normal economic conditions. Instead, the economy is facing unprecedented uncertainty, which is causing the normal rules-of-thumb to no longer apply.
To be specific, many companies that offer refinancing, including SoFi, are finding they cannot lower their rates to match the low rates being set by the Fed. In fact, in some cases, the rates for refinancing have actually gone up. There are a couple of reasons for this.
First, refinancers need to set their rates at levels that take into account the risk that a borrower won’t be able to repay their loan.
Again, in normal economic conditions, those risks are fairly predictable. In the current economy, however, assessing those risks is much harder, causing certain refinancing products to keep their rates high.
Second, since the Fed lowered rates to such historically low levels, there was an initial wave of interest in refinancing. To avoid taking on more customers than their businesses could serve, some refinancing products had to actually raise their rates to essentially steer borrowers away.
With all that said, there are some cases where refinancing can still make sense for an individual, but it isn’t automatically a good idea just because the Fed’s interest rates are low. The Fed rate does not directly affect federal student loan interest rates. Learn more about the recent changes to federal student loans in our SoFi Blog deep dive. If you think you might want to refinance existing student debt, learn more at our student loan help center.
If you are looking to refinance your mortgage, check out our home loan help center that has resources, guides, tips and more on all things home buying and refinancing. For all other types of refinancing products, email [email protected] or chat with us at SoFi.com.
What other impacts will the Fed’s rate cut have on my finances?
The Fed’s rate cut could have some positive benefits for individuals in terms of the rates you pay for certain lending products.
For example, many credit card products’ rates are linked to the Fed benchmark rate. In those cases, annual percentage rates (APRs) should go down, which can translate to savings on a card with a month-to-month balance.
On the flip side, certain interest-bearing savings accounts could see the interest rate paid go down as a result of the lower Fed rate.
There are many ways the Fed rate cut may affect your finances. Read more in this deep dive on Fed interest rates.
How long should we expect interest rates to remain this low?
It is very hard to predict what the future holds for interest rates, especially given the general uncertainty facing the U.S. and global economy.
SoFi Financial Planner Brian Walsh explained on a recent live Q&A we hosted on Twitter: “That’s a tricky question, that depends on the global economy. All we really can know for certain is what’s happening now. On a personal level, financial decisions can’t just be made on interest rates alone.
People have to consider their goals and financial foundation, in addition to interest rates, to make the best decision for themselves. It’s easy to get excited when interest rates are low, but it doesn’t change a person’s finances entirely.”
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SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF DECEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION. Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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