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As inflation normalizes, consumers may see lower borrowing rates for buying homes and cars and using credit cards. It won’t happen overnight, but it will provide solid relief for those who put their plans on hold.

The Federal Reserve (Fed) raised interest rates 11 times between March 2022 and July 2023 to combat soaring inflation, which peaked at over 9%. It increased its benchmark fed funds from 0.0%- 0.25% in March 2020 to a high of 5.25% to 5.50%. At its last meeting, the Fed made its first 50 basis point cut in September 2024 in four years as inflation moved closer to its target rate.

There will likely be smaller reductions (25 basis points each) in the coming Fed meetings before the end of the year. Expectations are for the Fed funds rate to be in the 4.25% to 4.50% which is still higher than preferred leading to possible cuts in 2025. Thankfully, a recession does not seem to be on the near-term horizon.  

The Fed uses this essential tool to either reduce high inflation after an overly strong economy or stimulate the economy when we are going into a downturn or recession.  How does the Fed affect loan rates and what does it mean for consumers in terms of reduced borrowing rates?

 Lower Interest Rates Typically Benefit Consumers

With higher interest rates, consumers tend to borrower and spend less, and take advantage of higher interest rates afforded by the banks for savings accounts and money market securities. However, a reduced fed funds rate means lower loan and savings rates, so consumers will borrow and spend more rather than save money in reduced yield bank accounts. If you have a lot of debt outstanding on credit cards, you may feel more relief although those interest rates will go down slowly.

However, the best result in lowering monthly payments is to improve your credit score, and you will see more significant incremental benefits.

While we can’t borrow at the fed funds rate, it directly and quickly influences most other interest rates such as the prime rate, the loan rate charged to the best creditworthy customers. Different consumer borrowing rates are often pegged to the prime rate, London Interbank Rate (LIBOR), or Treasury yields.

Two Factors Determine Your APR

The primary consumer financial products are mortgage loans, home equity lines of credit (HELOCs), car loans, credit cards, and student loans. Two essential factors: lenders use to determine your loan’s annual percentage rate (APR). They are:

1. Federal Reserve action to modify the federal funds rate.
2.   Your credit score.

What About Savings And Investments?

The savings account rates at banks will likely decline quickly by 25 basis points (or one-quarter of a percentage point), matching the fed’s lending rate for intra-bank loans overnight.

Our investments in financial securities, notably short and long-term debt and equity securities, tend to move in the opposite direction of interest rates. Therefore, the current markets will start to reflect increases to near-zero fed funds rates. If the next move is a rise in fed funds rates, that may cause market volatility. 

Lower borrowing rates often mean higher consumer and business spending and, therefore, more robust economic growth. Higher borrowing rates do the opposite, and consumers will slow their spending and increase savings because of higher yields at the bank. 

Before we look at how a Fed cut may influence consumer financial products, a little background on the Fed may be helpful.

A Short Primer On The Fed

The Fed is the central bank of the US. They regulate commercial banks and have the responsibility for conducting monetary policy. Its dual goals are full or maximum employment and stable prices, meaning low inflation.

The Fed uses its tools, notably the fed funds rate, to influence money, credit, interest rates, and the overall US economy through its monetary policy. The fed funds are the rate at which banks and other financial institutions can lend to each other overnight to meet mandated reserve levels set by the Fed.

The Federal Open Market Committee (FOMC) votes on raising, lowering, or keeping the fed funds rate unchanged. FOMC members meet at predetermined dates about eight times a year. The voting members of the FOMC are the seven Board of Governors of the Fed, notably Chairman Jerome Powell, plus the Presidents of five fed district banks (including the New York Fed).

The Fed Affects Our Financial Lives

You should have a working knowledge of what the Fed does, mainly interested in all aspects of money and investing.

The Fed, through its monetary policy, influences our economy, our borrowing and saving rates, as well as our investments. They have an influential role in controlling money supply based on economic and inflation indicators, factors that affect our economy and global markets.

The Fed’s role is multifold:

• Its the bank of last resort when other banks are unwilling to lend.
• Assess risk in our economy based on numerous variables.
• A fiscal agent to the US Treasury and supports its securities auctions to pay our budget deficit.
• Model for other central banks globally.
• Communicate publicly to explain its reasoning for actions.

Mortgages: Fixed Rate or Adjustable Rates

The fed funds are a short-term rate, but fixed-rate mortgages are long-term. When you borrow money to pay for your home purchase, you will likely choose between conventional fixed-rate mortgages or an adjustable-rate mortgage (ARM). Conventional mortgages are more common. The Fed doesn’t set mortgage rates, but their actions may influence the direction of the rates. Mortgage rates are affected by market factors, especially Treasury yields and market risk. They are also highly influenced by our personal financial factors like income, occupation prospects, down payment, assets,  and credit scores.

Fixed Mortgages

Fixed-rate mortgages are preferable for many home buyers. Your monthly payments are predictable for the length of your loan. Knowing your monthly amounts provides certainty and helps families to budget one of the highest costs.

Generally, 30-year mortgage rates are higher than the 15-year terms because of the longer time frame. Your credit scores will highly influence your rates, and a score of 750+ provides buyers with the lowest rates. I would encourage you to go for the shorter 15-year term as your total interest paid added to the home price is far lower.

Assuming you were applying for a 30-year loan, the lates average rate was 6.90%, according to Bankrate. This range reflects the best credit quality to fair (or riskier) borrowers. The 15-year average mortgage rate will be lower around 6.20%  These are higher rates than were available in January 2021 when the average 30 year fixed mortgage rate was historically low at 2.65%.

Potential For Loan Refinancing

Those of you who are buying homes now with higher fixed-rate mortgages will not be impacted by the Fed lowering the fed funds rate. However, if the Fed makes more rate cuts in the future, you consider refinancing your mortgage when it makes financial sense for you. Refinancing costs additional fees but will provide savings. 

HELOCs Rates Are Variable Loans

Most HELOCs are variable-rate loans. That means that your month-to-month may fluctuate depending on the market interest rate. The benchmark is usually the prime rate. Some banks may offer a fixed rate option for customers who desire predictability and budget their costs. Fixed terms are ten years and may range from 5-15 years.

Your HELOC loan is a credit line secured by the equity in your home and your creditworthiness. As your home serves as collateral like your mortgage, rates tend to be lower than credit cards. Once again, your credit score matters, along with the Fed rate, which will determine your monthly payments.

How HELOCs Work

You may obtain an available line of credit of $100,000 but only draw $25,000 of the funds to pay your contractor. You will only pay interest on the $25,000. This provides benefits for your credit score based on your utilization rate.

Generally, you may obtain your HELOC from your existing mortgage lender. It is a convenient way to tap the equity in your home to get available credit to borrow money for remodeling your kitchen. A slight reduction in your variable HELOC may help you incrementally.

Car Loans Rate Will Go Down With Fed Action

Most car loan rates are not directly impacted by the Fed reducing its benchmark rate but that does have influence on fixed terms pegged to Treasury yields and bank lending costs and your personal credit score. Your car loan interest rates differ from the APRs, with the latter including some fees on top of interest rates.  The average loan rates from myAutoloan were 5.69% on a 72-month loan for new cars depending on your credit score. Loan rates may vary based on three criteria.

1. New or Used Car

You will pay slightly more for a new car loan versus a loan for a used car or refinancing an existing loan.

 2. Credit Quality

As with all loans, your credit score matters. Your loan rate may range from excellent or 750+ , good or 650-699, or fair to poor on 450-649. Monthly payments may skyrocket with fair or poor credit.

3. Loan Term

Term length varies from 36 months to 96 months with the longer time frame requiring you the borrow to pay the highest rate. You should get to a shorter-term auto loan so you are not shelling out a lot of money on interest. Take the shortest loan term on cars that you can afford. That is a good strategy for any loans you apply for.

The length of the loans has been getting longer and longer. Edmunds says the most common term is for 72 months, with an 84-month loan next in line. Ads for loans are available as long as 96 months. That is an increase from 10 years ago when 60 months were the most common. A longer time frame means you are paying more in total interest cost on your loan.

What You Can Do About Lower Monthly Payments (Or No Payments At All)

Future car buyers may get reduced rates based on the latest Fed cut. However, your best path to a lower auto loan is to improve your credit score. Better yet, buy a used car outright without a loan if you can afford to do so. After years of car loans and leases (watch for hidden fees!), we bit the bullet and buy older cars with more mileage for cash. Getting rid of these monthly payments are a longer term relief.

Credit Cards Rates Go Down With Lower Fed Rates

Credit cards carry the highest borrowing rates of most consumer loan products.  As of October 2024, credit card interest rates climbed to 23.37%, significantly above rate of 16.43% in August 2020. Their rates link to the prime rate which is quickly influenced by the Fed’s benchmark rate, and will go down slowly. It’s best to pay your credit cards in full each month so you are not borrowing at such high levels.

Good News For Student Loans

There was some good news on federal loans for undergraduate and graduate students and their parents for the 2024-2025 school year. This is the first time that these rates have dropped in three years. The rates for these loans were tied to the Treasury auction for 10-year notes. These rates are still in force along with the Fed rates remaining near zero.

Federal loans are fixed only with 10-year loans as follows:

Type                                                       2024-2025                       

Direct Subsidized (student)                        6.53%                           

Direct Unsubsidized (student)                    8.08%                             

Direct Parent Plus  and Graduate               9.08%                            

 

There is a cap on the amount you may borrow from the federal government for student loans depending on the student’s dependency status, grade level, and past . Undergrads may borrow up to $57,500 in total for student loans from federal sources. It’s best to consult the Federal Student Aid guide on specifics. 

Due to federal loans being capped, some students will turn to private lenders where the credit scores of the students and parents matter. Loans may be fixed and potentially go for terms of 10-20 years or are variable. Private loans are typically above the interest rates set by the Federal government. Private banks may require a minimum credit score of 600-650 or better. So it is best to work on improving your credit report before borrowing.

Final Thoughts

The recent rate cut from the Fed was a welcomed event though it will likely have only marginal benefits for the average consumer. With lower interest rates it is cheaper to borrow than save. This usually leads to increases in spending, and favorable for economic growth as long as it doesn’t overly stimulate inflation.

Tackling debt can feel like a mountain of stress but the right books can provide the knowledge and confidence to conquer it. Books on debt management cover everything from understanding personal finances to building sustainable strategies. If you’re looking for an easy way to grasp the essentials, z-lib makes learning about finance easy and accessible, bringing invaluable financial lessons within reach at any time.

Photo by Alice Pasqual on Unsplash

Why Books Are a Powerful Tool for Debt Recovery

Books go beyond simple advice as they can become a trusted companion on your financial journey. A well-written financial guide doesn’t just inform but transforms your perspective on money management. By diving into pages filled with real-life examples and straightforward techniques, readers experience empowerment as they navigate towards financial stability.

Many books teach practical debt relief techniques, from creating budgets to boosting income streams. These texts cover everything from minimizing expenses to rethinking financial behaviors, giving you tools that build a stable path forward. Engaging with books offers readers a step-by-step approach where they find practical examples and motivational tips. This unique perspective helps you see your finances through a clear lens and find lasting solutions.

Key Books That Can Make a Difference

Here’s a look at some essential reads for managing and clearing debt. These books are tailored to give readers insights and methods that inspire financial growth:

• “Total Money Makeover” by Dave Ramsey: This guide focuses on tackling debt with a no-nonsense approach offering baby steps that make each goal achievable.
• “Your Money or Your Life” by Joe Dominguez and Vicki Robin: By transforming views on money this book helps readers connect daily choices with financial independence.
• “The Barefoot Investor” by Scott Pape: A practical yet entertaining book this offers simple steps that are easy to follow and surprisingly powerful.
• “Debt-Free Forever” by Gail Vaz-Oxlade: Designed to guide readers through every phase of debt elimination this book shows how to break free of debt cycles.
• “I Will Teach You to Be Rich” by Ramit Sethi: Known for a casual yet actionable tone this book makes finance approachable by teaching simple yet effective strategies.

These choices aim to blend actionable advice with inspiration, offering readers a well-rounded toolkit for managing debt. Books that combine practical strategies and an encouraging tone serve as invaluable allies on this path. Incorporating Z lib into this process can ease the access to numerous resources on budgeting, money management, and financial independence, bringing wisdom from various authors directly to your device.

Setting Goals and Building Better Habits

A big part of overcoming debt is about mindset as well as methods. When you work toward debt-free goals, it becomes essential to identify which patterns led to debt in the first place. With a fresh mindset and determined focus, readers can begin to build more sustainable financial habits. As you read, you’ll likely find suggestions on how to improve income sources and make the most of what you already have.

These books give readers methods to develop habits that prevent future debt. By structuring finances effectively, they build a lifestyle based on savings and wise spending. Each chapter serves as a practical resource that helps users analyze their spending, enabling them to recognize patterns and make more intentional choices.

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At the end of the lease, tenants have the right to receive their deposit back, provided they’ve met all the conditions of the rental agreement.

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