Since the recession of the late 2000s, the U.S. economy has continued to recover and grow again. Simultaneously, the cost of borrowing money, or the interest rate, is on the rise. According to Investopedia, these rates increase with economic expansion to help keep inflation and the average price of goods as low as possible. All of these terms might sound like a foreign language, but what it all boils down to is that the current economy is good for savers and investors, but not so great for people who owe money.
The availability of money in a good economy due to high employment rates and easy-access loans drives prices up, according to Victoria Duff of the Houston Chronicle. That’s where interest rates come in, rising with the economy to make borrowing cash more expensive and thus slow inflation. If the economy falls, interest rates do too, so there are more resources available to build everything back up again.
Rising interest rates are more likely to affect new debt than old loans, but that depends on what kind of interest rate each debt has. According to Jessica Dickler with CNBC, loans with fixed rates from before the rate hike won’t see any changes, but existing adjustable-rate loans will see an increase in interest costs. To avoid the pain of rising rates, investors can refinance their adjustable-rate loans to fixed ones, but they need to consider how much that move will cost.
The same is true for student loans. Federal loans have fixed interest, but if a graduate has private loans, their rates may rise, according to Dickler. Most credit cards also use a variable rate when charging interest on a carried balance. In both cases, borrowers should talk to a financial professional and see if they could save money by managing their debt with a solution that utilizes a fixed-interest rate before interest rates rise further.
Savers and investors
Rising interest rates hinder access to cash, which means lenders and borrowers are willing to spend more to gain the funds they need. Savings accounts — which give institutions money to lend — and investments like stocks and bonds are more likely to see better yields over time. This is especially true in the case of credit-deposit and money market accounts, according to James Garrett Baldwin at Investopedia. While individuals with little to no debt are more likely to benefit from higher interest rates, the increased cash flow takes a longer time to show up on this side of the system, depending on the financial institution paying the interest.
While a rising interest rate might look scary on paper, especially to debtors, it’s a sign that the economy is in good shape. Experts predict that rates will continue to rise, so now is a good time to talk to a financial planner for assistance.