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How Interest Rates Affect Finances

Interest rates continue to be high as we begin the new year, which can dramatically affect both personal and business finances, from credit cards to loans to investment.

The Federal Reserve Bond (the Fed) changes the target interest rate at which banks borrow and lend money to each other in response to rising and falling economic activity. When the economy is strong, interest rates rise, and vice versa. When rates are up, it makes accessing money more difficult and encourages less spending in an attempt to keep inflation at bay. So, what does this mean for you?

Borrowing Funds

Borrowing includes both short-term and long-term loans, such as credit cards, home equity loans, auto loans, student loans, and mortgages. If you are borrowing money, rising interest rates will make it more expensive to do so. For example, homebuyers may find it more difficult to afford a mortgage on a home at a higher price point which keeps home prices from appreciating.

Additionally, credit card interest rates will rise and fall according to the federal funds rate. This means that you should prioritize paying off your credit card balance in full each month to avoid accruing high interest rates on future payments. Making the minimum payment will still cost you interest, but it is also better than not paying anything at all.

If your loans have a “floating” interest rate, your cost of interest will increase as rates increase. However, if you have a fixed-rate loan, your interest rate will not change during the term of the loan.

Financial Markets

Interest rate changes also impact the stock market and other financial activities. Rising interest rates make it more expensive to raise capital, which can cause businesses to decrease growth and expansion efforts. If a company is cutting back or is viewed as less profitable, estimated future cash flows will decrease and the price of the company’s stock will go down as a result.

If a lot of companies’ stock prices go down, the key indexes of the market (e.g. Dow Jones and S&P 500) will also drop, making stock ownership less attractive. On the other hand, businesses like banks and brokerages often increase their earnings with higher interest because they can charge higher lending fees.

Lending

If you have bank deposits, certificates of deposit (CDs), or bonds, you can consider yourself a lender. Essentially, you have loaned money to a bank, organization, or the government in return for payment in interest back. Similarly to loans, the rate you earn will stay the same if you have a fixed rate — however, a rising federal rate can allow you to reinvest at higher rates as your loan(s) mature. If your lending investments are not quite close enough to maturing, the value will decrease with rising interest rates because the general level of rates for the market will rise as well and a fixed-rate loan will have a lower price.

Have more questions about the impact of interest rates on your financial health? At Republic Bank, we serve both individuals and small businesses in ensuring their banking, credit, loans, and more are where they want to be. Reach out to us today at 800-526-9127 for more information or find additional tips and best practices in our blog!

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