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Rising Interest
Rates and the
Federal Reserve:
What You
Should Know
The Federal Open
Market Committee lowered
the federal funds rate to
between 0.00% and 0.25%
in 2008 to help stimulate
the struggling economy. For
consumers, this has meant
historically low interest rates
on home and auto loans
because the federal funds
rate influences the interest
rates provided by lenders. As
the economy improves, many
believe the Federal Reserve
is positioning to increase the
federal funds rate. If the rate
increases, borrowers may
face higher finance charges
on new auto or home loans
and existing loans or credit
card balances with variable
interest rates.
"If loan rates increase by
one or two points, trading
for a new vehicle will be
more expensive," says Greg
Olmsted, President and CEO
of North Alabama Educators
Credit Union. "For example,
a $20,000 auto loan financed
for 60 months at 2.39% APR
would compute to $354
monthly. If loan rates rise
to 4.39% APR, that same
vehicle would have a monthly
payment of $372, which
equates to more than $1,000
in additional finance charges
over the life of the loan."
It's not all bad news for
consumers, though. A rise
in the federal funds rate will
also mean greater interest
accrual on monies stashed
away in savings.
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