Feds Raising Rates: What You Need to Know
The Feds have signaled that they’ll likely raise interest rates again in 2022.
And this is important to know if you plan on taking out a loan in the near future. Because interest rates affect almost everything, but most especially loans.
When interest rates are higher, borrowing money — whether it’s to buy a house, a car, or something else entirely — is more expensive.
In this article, we’ll discuss rising interest rates and how they affect you.
What Is the Federal Reserve, and How Does it Impact Interest Rates?
The Federal Reserve, also known simply as the Fed for short, is the central bank of the United States. And it’s responsible for setting monetary policy.
One of the tools it uses to influence the economy is setting the federal funds rate, which is the interest rate banks charge each other for overnight loans. When the Fed raises rates, it becomes more expensive for banks to borrow money, which in turn influences the rates they charge consumers and businesses for loans.
As a result, a Fed rate hike — like the one that’s expected before the end of this year — can have a ripple effect on everything from mortgage rates to credit card rates.
How Commercial Debt Raising Interest Rates Affects You
As interest rates rise, the cost of borrowing money also increases.
This can make it more difficult to qualify for a loan, as lenders are typically more conservative when rates are high. As a result, you may need a higher credit score or provide a larger down payment to secure financing after the Fed increases rates.
Rising rates can also affect your ability to make large purchases, such as a car or a home. If you have already been approved for a loan, higher rates will increase your monthly payments. For example, a $200,000 mortgage at 4% interest would have monthly payments of $954. If rates rise to 5%, the same loan will have monthly payments of $1,052 — an increase of $98 per month. Over the life of the loan, this would add up to nearly $12,000 in additional interest charges.
As you can see, rising interest rates can have a significant impact on your financial plans. Therefore, it’s important to stay up to date on rate changes and factor them into your budgeting decisions.
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