How a low interest rate environment can help your financial journey
How we live our lives to how we manage our money adjusts year to year. To assist consumers in their financial recovery and help get the economy moving, the Federal Reserve announced in March that it would keep interest rates at rock-bottom levels.
Note: You can learn more about the Federal Open Market Committee and review their meeting minutes here.
It sounds like good news—but what does it mean for you personally, and how can you use this information to improve your financial wellness?
Understanding the low interest rate environment
To make the most of the current low interest rates, you’ll need to understand how the Federal Reserve rate affects you. Interest is essentially the cost of borrowing money. You pay it whenever you take out a loan, mortgage or credit card. You also receive it from your financial institution whenever you open a savings account or invest in a retirement fund.
The federal rate sets the baseline for the market rates you’ll encounter. When the federal rate is low, that doesn’t mean you get to take out interest-free loans. What it does mean is that the rates you encounter will be at their lowest until the Federal Reserve decides to raise them again.
The interest rates you pay and receive during this time will vary depending on your financial institution. Credit unions typically charge the lowest interest rates on loans and pay the highest rates on your savings and investments, allowing you to get the most benefit for your money regardless of what the federal rate does.
How to take advantage of low interest rates
When the cost of borrowing money is low, it’s the perfect time to improve your financial situation with a little strategic borrowing. Your best bet? Lock in a historically low interest rate on a fixed-rate loan.
With a fixed rate, your interest rate (and monthly payment) will never go up—even when the federal rate starts to rise again. You’ll save a significant amount over the life of your loan, laying a solid foundation for your long-term financial health.
For example, you could:
Make a major purchase. The more money you borrow, the more impact your interest rate will have on your finances. With interest rates at their lowest, now is the perfect time to take the leap on any big-ticket purchases or expenses you’ve been planning, such as:
- Buying a home.
- Financing a vehicle.
- Expanding your family.
- Making major home improvements.
- Getting a college degree.
Refinance a loan. If you’re already carrying a mortgage, vehicle or other large loan balance, you could opt instead to refinance your existing loan at a lower interest rate. This will allow you to reduce your monthly payment, pay off the balance faster, and reap significant savings over the lifetime of your loan. For example, you could refinance your home with a 15-year mortgage.*
Consolidate your debts. If your main financial goal right now is to get out of debt rather than take on more, you can take advantage of the current environment by consolidating your high-interest credit card balances into a single low-interest loan. You’ll have just one monthly payment to worry about, and the lower interest rate means you can pay more toward the principal, shrinking your debt more quickly.
By keeping the federal rates low, the Federal Reserve is inviting consumers to borrow money and help stimulate the economy. With a little strategic borrowing, you can use this to your advantage and stimulate your own finances. Wherever you are on your financial journey, there’s a way to leverage the low interest rate environment to improve your overall financial wellness.